Bank of England increases interest rates by 0.5% to 3.5%

The Bank of England's Monetary Policy Committee has voted 6-3 to increase Bank Rate by 0.5% to 3.5%, the highest level since October 2008.

This is despite annual inflation easing back to 10.7% in November, down from 11.1% in October.

Two members preferred to maintain Bank Rate at 3%, and one member preferred to increase Bank Rate by 0.75 percentage points, to 3.75%.

CPI inflation is expected to continue to fall gradually over the first quarter of 2023, as earlier increases in energy and other goods prices drop out of the annual comparison.

The announcement in the Autumn Statement that the extension of the EPG will cap household unit energy prices has also reduced the MPC’s forecast for CPI inflation in Q2 2023.

In its meeting minutes, the MPC said: "The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response."

The majority of Committee members also believe that, should the economy evolve broadly in line with its projections, further increases in Bank Rate may be required to bring inflation back to target.

Mark Harris, chief executive of mortgage broker SPF Private Clients, said: "While 3.5% may not be the peak for base rate, we don’t believe it needs to, or can go, much higher.

"Fixed rates are influenced by future base rate movements and therefore not directly linked to what is decided this week. Indeed, the pricing of fixed-rate mortgages, which soared after the mini-Budget, continues to drift slowly down, with five-year fixes breaching the 4.5% barrier this week and expected to drop below 4% in the new year. Come 2023, we could see five-year fixes priced below base rate."

Paul Brett, managing director of intermediaries at Landbay, commented: “Base rate started to go up a year ago, kicking off the first of nine increases in a row in an effort to curb rising inflation, rising from 0.1% to 3.5% today. Before that a December rise last happened in 2007 and 2008 as we faced the global financial crisis.

“In times like this, the role of the mortgage adviser is more important than ever, whether for purchase or remortgage. There will be significant opportunities for advisers who have a real understanding of the criteria and idiosyncrasies of lenders who are labelled as ‘specialist,’ both residential and buy-to-let.”

Nitesh Patel, strategic economist at Yorkshire Building Society, added: “The 0.50% rate rise was expected by most analysts with inflation easing to 10.7% in November from October’s 41-year high of 11.1%. While the latest UK labour market report showed some further signs of cooling, despite unemployment edging up, pay growth was also on the rise, but overall conditions remained tight.

“The Bank has now raised rates by a total of 2.25% in the past four months and nine times since last December – by its own standards this is pretty aggressive tightening of monetary policy as the Bank strives to bring inflation under control.

“Higher rates typically take 18 months to impact households and businesses, so some of the earlier increases may not have any impact on bringing inflation down until next year. Though we cannot forget 80% of the outstanding mortgage stock is on a fixed rate and the five-year fixed rate deals taken out in the bumper year of 2018 will come up for renewal in 2023, which is close to two million households. So, from next year many borrowers will be faced with higher monthly payments which could still come as a shock to some.

“Whether or not we’ll see any further hikes depends on where inflation peaks. The Bank will at some point need to ask how much enough is enough. Most economists expect inflation to start falling in the second half of next year and hit the 2% target in 2024, but it will be hard graft if we’re to see that happen.”