Interest rates rise to 5.25 per cent as Bank battles inflation

The Bank’s decision-making Monetary Policy Committee (MPC) said there were signs inflation was becoming embedded.

“Some key indicators, notably wage growth, suggest that some of the risks from more persistent inflationary pressures may have begun the crystallise.”

The Bank said it now expected inflation — which in June stood at 7.9% —to return to 2% target by the second quarter of 2025, and could fall to around 5% by the end of this year “owing to lower energy, and to a lesser degree, food and core goods price inflation”.

The average household is expected to pay less than £2,000 for their energy when the price cap is next changed in October, the Bank’s forecast said.

Andrew Bailey, the Bank’s governor, said: “Inflation is falling and that’s good news. We know that inflation hits the least well off hardest and we need to make absolutely sure that it falls all the way back to the 2 per cent target. That’s why we’ve raised rates to 5.25% today.”

Unusually, there was three-way disagreement on the MPC.  Two members wanted to go further and hike the interest rate by more than 0.25 percentage points, while another wanted to keep it unchanged.

The two looking for more, said the Bank had repeatedly underestimated how high inflation would remain and that it was “important to lean more actively against inflation persistence.”

A small protest of around half a dozen people gathered outside the Bank on Thursday to protest against interest rate hikes.

The fall in inflation is good news for Rishi Sunak who made halving the rate one of his five key targets at the start of the year when it was sitting at 10%.

Responding to the decision, Chancellor of the Exchequer, Jeremy Hunt said:“If we stick to the plan, the Bank forecasts inflation will be below 3% in a year's time without the economy falling into a recession. 

“But that doesn't mean it's easy for families facing higher mortgage bills so we will continue to do what we can to help households.'”

The Scottish Greens economy spokesperson, Maggie Chapman, said the interest rate hike would be painful for the estimated 115,000 Scottish households who are on standard variable rate mortgages and 85,000 on tracker loans.

She also pointed to the 120,000 households in Scotland with fixed rate mortgages due to expire this year. 

“The Tories talk aspirationally about home ownership, but they are failing to support that aspiration as they have delivered the highest interest rates for a generation," she said.

“After 13 years of misrule from successive Tory governments, we are living through the dire consequences of their brutal economic policies.

“Hundreds of thousands of households and families all over the country have already been plunged into poverty and debt as a result of Tory failures. Today’s announcement will only increase the pressure and anxiety they are feeling."

Tracy Black, the director of CBI Scotland, predicted more increases to interest rates in the months to come. 

She said: "With inflation having come down quicker than expected in June, the pressure was eased on the MPC to deliver another bumper rate rise.

"But, with inflation close to 8% – quadruple the Bank’s target – and wage growth around 7%, interest rates are likely to head higher in coming months.

“Economic conditions remain challenging for households and businesses alike. For firms, the cost of inputs is a third higher than pre-pandemic, the labour market remains very tight driving up wage and recruitment costs, and demand is sluggish.

"Meanwhile real incomes are still falling for households and higher interest rates are squeezing spending power further.

"To drive up growth and living standards in the UK without generating inflation, we need investment to increase the productive capacity of the economy. Improvements in the tax and regulatory system – as recommended in our recently published tax roadmap and green growth reports – can provide a platform for transforming the UK economy.”

Helen Morrissey, head of retirement analysis, Hargreaves Lansdown said the hike would "piles further misery on homeowners with those on tracker mortgages seeing rises overnight."

She added: "Standard variable rate mortgage holders may find their rates move up slightly less but, with budgets under strain, any increase is hugely unwelcome.

"For fixed rate mortgages, the story is different with signs that we may be around the peak. 

"We’ve seen big rises in fixed rates in recent times which have caused real alarm. After rising from less than 6% in the middle of June, the average two-year fixed-rate mortgage hit 6.86% in late July, according to Moneyfacts.

"However, by yesterday, they had inched down to 6.85%. In recent days, we’ve seen a raft of major lenders cut their rates, so we’re expecting average rates to drop further.

"This is because fixed rate deals are priced based on what the market expects to happen to interest rates in the future.

"As inflation proved hard to tame, we saw rates rise but the recent sharp fall means the market isn’t expecting interest rates to go quite so high.

"As a result, it’s cheaper for lenders to secure a fixed rate, so they are passing those savings on. Any downward trend will be welcomed by people looking to fix their mortgage costs, though it’s fair to say people looking to re-mortgage are finding themselves in a very different world to the one they were in when they got their previous deal."

The MPC now expects gross domestic product to expand by 0.5 per cent in 2023, up from its May forecast of 0.25 per cent.

Next year GDP is forecast to grow by 0.5 per cent, down from the Bank’s previous forecast of 0.75 per cent.

In 2025 growth is forecast to slow to 0.25 per cent, compared with the 0.75 per cent expected in May.