Bank of England hikes interest rate to 5% in highest figure in almost 15 years

The Bank of England has pushed interest rates up to 5%, the highest it has been since 2008, ITV News' Stacey Foster, Joel Hills and Robert Peston explain how this will impact us

The Bank of England has unexpectedly hiked the official interest rate to the highest rate in almost 15 years.

It announced it would raise the rate from 4.5% to 5% on Thursday its latest bid to tame inflation - higher than analysts' predictions of 4.75%, and the sharpest increase since February.

It is the 13th rise in a row, and comes as the government rules out helping homeowners struggling with soaring mortgage repayment rates.

Chancellor Jeremy Hunt responded to the latest rates increase, saying the government had a “watertight” resolve to bring inflation down and “if we don’t act now, it will be worse later”.

He said: “The lesson from other countries is that if you stick to your guns, you bring inflation down.

“Our resolve to do this is watertight because it is the only long-term way to relieve pressure on families with mortgages. If we don’t act now, it will be worse later.”

Chancellor Jeremy Hunt. Credit: Jordan Pettitt/PA

In the wake of the latest hike, Prime Minister Rishi Sunak told the Times CEO summit “the reason interest rates are going up is because inflation is too high” and that the government will “remain steadfast in its course” to curb inflation.

The Bank is tasked with keeping inflation as close to 2% as it can, and has been responding by raising the base interest rate.

The move is set to deepen the mortgage crisis as borrowing costs are hiked up for the 13th time in a row.

Bank of England governor Andrew Bailey said: “The economy is doing better than expected, but inflation is still too high and we’ve got to deal with it.

“We know this is hard – many people with mortgages or loans will be understandably worried about what this means for them.

“But if we don’t raise rates now, it could be worse later.”

Andrew Bailey, governor of the Bank of England Credit: Jordan Pettitt/PA

But ministers and officials have insisted the cost of living will fall, even as three consecutive drops in inflation figures were interrupted last month by a higher-than-expected inflation reading in May.Food and energy prices have been blamed as a key driver of inflation, squeezing households' finances across the UK.

But economists have warned the surprise inflation pause was likely to lead to higher mortgage rates for homeowners, while one adviser to the Chancellor said a recession might be needed to get it under control.

The Office for National Statistics (ONS) said the Consumer Prices Index (CPI) including owner occupiers’ housing costs (CPIH) rose to 7.9% in May, up from 7.8% in April.

The rates rise is likely to further will be exacerbated by so-called core CPI, which rose to 7.1% in May from 6.8% in April.

'I’m here to tell you that I am totally, 100%, on it': Mr Sunak addresses the hike in interest rates in front of workers in Kent

The figure – which excludes the price of energy, food, alcohol and tobacco – is often more in focus for the Bank’s decision-makers when they set interest rates.

On Wednesday, Downing Street insisted that despite the setback, the plan to halve inflation by the end of the year was on track and "remains the target".

In May, CPI was 8.7%, compared to the 8.4% experts had forecast, the ONS said.

Households brace for impact on mortgages and rents

Experts said inflation figure will heap extra financial pressure on households, and homeowners with mortgages are likely to face more interest rates increases as a result.

Renters are also bracing for impact, as some landlords with mortgages pass on their rising repayments to tenants, while others cash in on demand, or lift rents to match the pressured market.

But the latest interest rate hike is likely to pile even more pressure on mortgage-holders as rates are already at close to 15-year highs.

Some are lobbying the government to provide mortgage relief to struggling households.

The average rate for a two-year year fixed rate mortgage deal has edged above 6% for the first time since December.

On Monday, the average rate for a two-year fixed-rate mortgage stood at 6.01% according to the financial information service Moneyfacts.

The latest interest rates rise leaves first time buyers, mortgage-holders moving off fixed deals, and those on variable rates exposed to higher repayments.

As of Monday, before the latest rise, a homeowner taking out a two-year fixed-rate mortgage could end up paying over £300 per month more than if they had taken out a deal a year ago, according to analysis by a financial information website.

Someone with a £200,000 mortgage could end up paying just under £1,290 per month, found.

This was based on the average two-year fixed-rate mortgage rate on the market on Monday, at 6.01%.

Rishi Sunak said the government needs to 'stick to the plan'. Credit: PA

Despite the increased pressure on homeowners, Rishi Sunak earlier this week told ITV's Good Morning Britain the government needs to "stick to the plan" to tame inflation.

Labour's shadow chancellor has ruled out the party backing suggestions the government should bring in subsidies or financial support for mortgage holders.

Rachel Reeves said under Labour's plans, banks would instead be forced to help mortgage holders struggling with payments.

Labour said the government should compel lenders to allow borrowers to temporarily switch to interest-only payments or lengthen their mortgage period.

Banks would also have to wait at least six months before starting repossession proceedings as part of Labour's five-point plan, which it said it would put into effect if it took power.

Mortgage rates have risen due to interest rate hikes by the Bank of England designed to weigh on inflation Credit: Yui Mok/PA

Do officials want the UK economy to plunge into a recession?

Karen Ward, a JP Morgan economist who advises the chancellor, said the Bank of England has to “create a recession” if it is to control inflation.

She said only this could interrupt the so-called 'wage-price spiral' where companies put prices up, forcing workers to ask for pay rises, which means companies increase prices further to pay for those new salaries.

In recent months, the chancellor has also been in talks with the food industry over soaring grocery prices.

In May, the chancellor met with industry leaders to discuss those concerns, in the wake of the Competition and Markets Authority's announcement it would investigate whether “any failure in competition” is causing consumers to face higher prices.

The ONS said the increase in food prices slowed from 19.1% in April to 18.4% in May after hitting a 45-year high in March.

The increase in the price of milk, cheese and eggs eased the most, the ONS said, while fish was the only food item whose cost increased, largely driven by the price of canned tuna.

Food prices soared 15.7% in April – the highest on record Credit: PA

Millions falling behind on bills as everyday spending costs rise

The latest interest rates news means added pressure for households that are already struggling.

Figures from the Money Advice Trust show that since March 2022 the number of adults who are behind on one or more household bill has risen from 7.9 million to 11.6 million.

The Retail Price Index (RPI), which is used to calculate the rise in train fares among other things, dropped from 11.4% in April to 11.3% in May.

Inflation has been falling in recent months, but a lot of that is simply due to the way that the figure is calculated.

Prices are measured against where they were a year before.

That means that while inflation rates have fallen, part of this is because today’s inflation figures are being compared against a time when costs had already risen.

To set inflation figures, the ONS tracks the prices of dozens of different items that households buy.

Wednesday’s CPI figures mean that a shop which cost around £100 a year ago would cost around £108.70 today.

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