The central bank’s Monetary Policy Committee (MPC) took the decision to raise the UK’s base rate by 0.75 percentage points in an attempt to cope with the skyrocketing rate of inflation in the UK. country. As a result, interest rates have risen from 1.75% to 2.50%, which will have a huge impact on savers and borrowers in the UK. The “record rise” represents the largest interest rate rise in 14 years, indicating that the Bank of England is taking bold steps to ease the country’s cost of living crisis.
Banks and building societies will seek to pass on this rate increase to their savings clients, who are seeing their returns decline due to inflation.
Last week, inflation was 9.9%, down slightly from the 10.1% recorded the previous month.
Despite this boon for savers, borrowers and homeowners will have to pay an additional £3.1billion in interest payments for those with standard and tracker variable rate mortgages.
Alastair Douglas, the CEO of TotallyMoney, noted that further interest rate hikes will “put the pressure on” on more than two million homeowners as the cost of living continues to rise.
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Reacting to the announcement, economist Thomas Pugh of RSM UK said: “The current 50 basis point rise in interest rates means the Bank of England is probably only a little over the edge. half of its tightening cycle.
“The Monetary Policy Committee (MPC) is unlikely to suspend its tightening cycle until there is evidence that wage growth, currently at 5.5% year-on-year, is starting to approach 3 % year on year that the MPC believes is in line with its 2% inflation target.
“This will require a significant rise in the unemployment rate from its current 48-year low of 3.6 percent.”
Originally, financial analysts expected the base rate to rise by 0.75%.
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The Monetary Policy Committee voted 5-4 in favor of raising interest rates, indicating that the financial institution is divided in its opinion.
Alice Haine, personal finance analyst at Bestivest, believes it’s a sign the bank is “serious about bringing inflation down to more acceptable levels”.
She added: “”The Bank of England’s decision to raise the benchmark lending rate by 50 basis points at this month’s meeting, delayed a week by the mourning period of the Queen Elizabeth II, marks the first time interest rates have risen 0.5% in two consecutive months since December 1994.
Charlie Huggins, head of equities at Wealth Club, noted that the financial institution is “stuck between a rock and a hard place”.
He explained: “A softer approach to rate hikes risks sending the pound plummeting and inflation spiraling even further out of control.
“But excessive tightening could easily stifle the life of the economy, without significantly easing the cost-of-living crisis. It’s a horrific balancing act, with seemingly no good results.
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Laura Suter, head of personal finance at AJ Bell, explained how the financial institution mirrors similar decisions made in Europe and the United States.
Ahead of the announcement, Ms Suter explained: “The Bank of England could be on the verge of raising interest rates by their highest ever amount, with an increase of 0.75 percentage points marking a record rise.
“Markets are braced for an exceptional hike from UK rate regulators, to follow in the footsteps of US and European central banks.”
Ray Black, managing director of Money Minder, explained how savers will be affected by today’s decision by the Bank of England.
Mr. Black said: “Rising interest rates have an effect on all sectors of the economy. Interest rate hikes are often good news for banks and people with cash savings who will receive a higher return on their money.
“However, with double-digit inflation and the best easy-to-access savings accounts paying less than 2% and the worst paying less than 0.5%, it would take many more rate increases before savers earn a return on cash above inflation, and it seems very unlikely that this will happen in the short term.
“The low long-term interest rate environment that we have become accustomed to over the past two decades has meant that banks have not been able to generate the profits they previously enjoyed on loans, as their margins have been reduced.
“However, when interest rates rise, they may charge their borrowers more, which should increase their earnings and, therefore, their stock price.”