BoE raises base rate to 0.5 per cent

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BoE raises base rate to 0.5 per cent
Luke MacGregor/Bloomberg

The Bank of England has raised the base interest rate to 0.5 per cent, the second increase in as many months.

The Monetary Policy Committee voted 5-4 to increase the rate by 0.25 percentage points, the four members voting against it asked for a hike of 0.5 percentage points to 0.75 per cent. 

The hike was expected by analysts, as the central bank had not made any moves to quell market speculation of a 0.25 percentage point rise.

The MPC also voted unanimously for the bank to begin to reduce its purchases of UK government bonds, as well as to reduce the stock of sterling non-financial investment-grade corporate bond purchases. 

In the announcement today (February 3), the committee said it expects UK GDP growth to slow to "subdued" rates due to the impact of higher global energy and goods prices. 

The bank also expects inflation to increase to 6 per cent in February and March, to a high of 7.14 per cent in April. 

It added that it expects inflation to "dissipate over time", and drop back to the BoE's 2 per cent target within two years.

Soaring inflation

The rise in rates comes after inflation continued to soar last year, until it reached a 30-year high in December of 5.4 per cent. 

Price rises in transport, food, and household goods, alongside a leap in energy costs, drove the consumer prices index to its highest level since March 1992.

The rate of inflation has overshot the Bank of England’s 2 per cent target since May 2021.

The average homeowner (with a floating rate mortgage) will pay £51 more per month as a result of the latest rate hike, according to UK Finance.

The data is based on a mortgage with £123,640 in debt remaining, at a pre-rate rise rate of 1.65 per cent.

Kevin Roberts, director of Legal & General Mortgage Club, said: “Today’s decision will have largely been taken to curb inflation, but that won’t be of much consolation to homeowners facing stretched finances, higher debt repayments and the rising cost of living.

"Speaking with a professional mortgage adviser is an essential next step for all homeowners – with rates set to rise further, doing so now could prove to be a wise move in limiting the financial impact.”

Investors should look to value

Guy Monson, chief investment officer at Sarasin & Partners, told a conference yesterday that the appropriate response to accelerating rates rises was to adopt a different portfolio structure than the one that has powered returns over the past three years, and investors should move towards a more value-driven approach.

“You’ve seen this extraordinary rally in bank stocks as yield curves start to steepen, which will be very positive for [the stocks]...and you need to substitute some of those bonds that are going to be under pressure with strong growing dividends.”

He said that recent corporate earnings data have made it clear that a number of firms are reporting extremely strong cash flows.

“So those dividends by [share] buybacks are going to be there.”

Other actions can be taken to ease the impact of rate rises on personal finances, said Rachel Winter, associate investment director at Killik & Co.

"While rates are still relatively low, now is an excellent time to take advantage of fixed-term mortgages and loans.”

Edward Hutchings, head of rates at Aviva Investors, said: “As expected the Bank of England hiked interest rates to 0.50 per cent, however with four members of the committee voting for a 50-basis point increase, there is certainly a hawkish skew.

"Further, with the announcement to unwind the corporate bond purchases, this will turn up the heat and focus on the unwind of Gilt purchases when interest rates hit 1 per cent.

"This now may well be sooner than when than most investors had initially thought and we could well see gilt yields move further higher from here.”