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Bank of England Administers ‘Shock Therapy’ with Unanticipated Rise in Interest Rates to 15-year High

In an unexpected move, the Bank of England (BoE) has raised interest rates by 0.5% to 5% in its latest attempt to curb the UK’s stubbornly high inflation. Current inflation rates sit at 8.7%, a reduction from previous months yet still significantly higher than the BoE’s 2% target.

This decision follows last month’s decision to hike the base rate by 0.25% to 4.5%, the 13th consecutive time since the onset of the previous year. The Bank anticipates rates will climb to 4.45% before inflation starts to retract, with a target of 3.5% by year-end.

The Office for National Statistics’ recent inflation report revealed that while the economy is predicted to expand in the forthcoming months, a dramatic surge in food prices is chiefly responsible for the nation’s high overall inflation.

The property sector is already experiencing the consequences of the Bank’s policy with elevated mortgage rates impacting home buyer, mover and landlord confidence. Andrew Bailey, the governor of the BoE, acknowledged the negative side effects of increased interest rates, saying, “We are aware that higher interest rates create difficulties for many people. However, high inflation disproportionately impacts the least wealthy. Our role is to maintain low and stable inflation, which necessitates raising rates to lower inflation.”

Reaching its peak in 15 years, the Bank of England’s base interest rate now stands at 5%. However, the Bank hinted at further increases. The surprise half a percentage point increase to 5% – the highest since 2008 – caught economists and investors off-guard. The majority of economists anticipated the Monetary Policy Committee to raise interest rates by only a quarter percentage point. Yet, the committee voted 7-2 in favour of the sudden increase, with the aim to control escalating inflation.

The UK currently has the highest inflation of any G7 country and is expected to see its interest rates peak higher than other major economies. The bank communicated that if signs of persistently high inflation continue, further monetary tightening would be needed.

There is concern among some that this unexpected increase could push the UK towards a recession. The Bank has not yet updated its forecasts to account for this, which is expected to happen next month.

Following today’s announcement, those with tracker mortgages, which are tied to the bank’s base rate, will feel the immediate impact. Meanwhile, those switching to a fixed-rate mortgage may already be locked into a higher rate.

In response to the news, Shadow Chancellor Rachel Reeves criticised Jeremy Hunt and Rishi Sunak for ignoring the plight facing mortgage holders. She expressed concern for families across Britain worrying about the implications of the interest rate rise.

The government responded through Chancellor Jeremy Hunt, who emphasised the need to act on high inflation, which he deemed a destabilising force.

The property industry also weighed in on the decision. Matt Smith of Rightmove and Jason Tebb of highlighted the anticipated impacts on the property market, while Nathan Emerson of Propertymark highlighted the potential silver lining for buyers, with a further shift towards realistic and sustainable house prices.