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Bank of England raises interest rates by a half point to 5%
Move brings borrowing costs to highest level since April 2008 as Bank intensifies efforts to control inflation
Business live – latest updates
Richard Partington Economics correspondent
Thu 22 Jun 2023 13.09 BST
The Bank of England has raised interest rates by a half point to 5% as it intensifies its efforts to tackle stubbornly high inflation, adding to the strain on households struggling with soaring mortgage costs.
In what will be seen as a major move, the Bank’s monetary policy committee (MPC) increased rates for the 13th consecutive time to the highest level since 2008. Before the decision was announced, financial markets were evenly split on whether the Bank would vote for a half-point rise or a smaller quarter-point increase.
The latest rise in borrowing costs comes after figures on Wednesday showed inflation remained unchanged at 8.7% in May , driving expectations that the central bank would have no choice but to respond. Inflation was expected to fall to 8.4%, which would still have been well above the Bank’s 2% target.
Amid a growing sense of alarm over stubborn inflationary risks, the MPC said: “There has been significant upside news in recent data that indicates more persistence in the inflation process, against the backdrop of a tight labour market and continued resilience in demand.”
The Bank said that it would continue to watch for persistent inflationary risks, and would further tighten interest rates if necessary.
It heaps further pressure on the government as the prime minister, Rishi Sunak, faces calls to intervene to help mortgage holders struggling with soaring bills, either directly or by forcing lenders to be more lenient.
Responding to the move, the chancellor, Jeremy Hunt, said the government’s resolve to bring down inflation was “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.”
Seven members of the Bank’s rate-setting panel, including the governor, Andrew Bailey, voted for a half-point increase, outnumbering two members – the independent economists Swati Dhingra and Silvana Tenreyro – who pushed for interest rates to be held steady amid concern over the impact on the economy from 12 previous hikes.
The move comes as households across the country face a surge in mortgage repayments as the impact from earlier rate hikes feeds through to the cost of home loans, in a development heaping pressure on the government as millions of families struggle with soaring bills.
In a fortnight of turmoil in the mortgage market, high-street lenders and building societies had rushed to pull hundreds of cheaper deals on new home loans ahead of the Bank’s latest decision, while pushing up the cost of a typical two-year fixed-rate mortgage above 6% – the highest level since Liz Truss’s disastrous mini-budget last autumn.
Borrowing costs have risen steadily since the Bank first began raising rates from a record low of 0.1% in December 2021. More than a quarter of mortgage holders are expected to come to the end of cheap deals struck before this time – leaving millions of people facing a “mortgage timebomb” of higher borrowing costs.
Writing in a letter to the chancellor, the Bank’s governor, Andrew Bailey, warned the large share of households who were on cheaper fixed rate mortgages meant “the full impact of the increases in Bank rate to date will not be felt for some time”.
Luke Bartholomew, senior economist at investment giant abrdn, said Thursday’s hike in interest rates could be “an important milestone” towards recession, as higher borrowing costs sharply reduce disposable incomes.
Threadneedle Street had moved earlier this year to begin winding down its rate-hiking cycle, cutting the pace of interest rate increases from 0.5 percentage points to smaller quarter-point increases from March. However, the return to a tougher stance comes after several shock readings from the economy highlighted the risk of stubbornly high inflation.
The MPC warned there were signs of “second-round effects” setting in, as the initial inflationary burst seen in the wake of the Covid pandemic and Russia’s invasion of Ukraine become increasingly entrenched in the economy. It said this could be seen in both domestic price increases set by companies, and by pay settlements for workers being maintained at higher levels than was consistent with its 2% inflation target.
Although noting that some future indicators of pay growth and good prices had weakened, there had also been “recent upside surprises” to justify its tougher half-point increase.
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Subscribe me for daily news updates
Bank of England raises interest rates by a half point to 5%
Move brings borrowing costs to highest level since April 2008 as Bank intensifies efforts to control inflation
Business live – latest updates
Richard Partington Economics correspondent
Thu 22 Jun 2023 13.09 BST
The Bank of England has raised interest rates by a half point to 5% as it intensifies its efforts to tackle stubbornly high inflation, adding to the strain on households struggling with soaring mortgage costs.
In what will be seen as a major move, the Bank’s monetary policy committee (MPC) increased rates for the 13th consecutive time to the highest level since 2008. Before the decision was announced, financial markets were evenly split on whether the Bank would vote for a half-point rise or a smaller quarter-point increase.
The latest rise in borrowing costs comes after figures on Wednesday showed inflation remained unchanged at 8.7% in May , driving expectations that the central bank would have no choice but to respond. Inflation was expected to fall to 8.4%, which would still have been well above the Bank’s 2% target.
Amid a growing sense of alarm over stubborn inflationary risks, the MPC said: “There has been significant upside news in recent data that indicates more persistence in the inflation process, against the backdrop of a tight labour market and continued resilience in demand.”
The Bank said that it would continue to watch for persistent inflationary risks, and would further tighten interest rates if necessary.
It heaps further pressure on the government as the prime minister, Rishi Sunak, faces calls to intervene to help mortgage holders struggling with soaring bills, either directly or by forcing lenders to be more lenient.
Responding to the move, the chancellor, Jeremy Hunt, said the government’s resolve to bring down inflation was “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.”
Seven members of the Bank’s rate-setting panel, including the governor, Andrew Bailey, voted for a half-point increase, outnumbering two members – the independent economists Swati Dhingra and Silvana Tenreyro – who pushed for interest rates to be held steady amid concern over the impact on the economy from 12 previous hikes.
The move comes as households across the country face a surge in mortgage repayments as the impact from earlier rate hikes feeds through to the cost of home loans, in a development heaping pressure on the government as millions of families struggle with soaring bills.
In a fortnight of turmoil in the mortgage market, high-street lenders and building societies had rushed to pull hundreds of cheaper deals on new home loans ahead of the Bank’s latest decision, while pushing up the cost of a typical two-year fixed-rate mortgage above 6% – the highest level since Liz Truss’s disastrous mini-budget last autumn.
Borrowing costs have risen steadily since the Bank first began raising rates from a record low of 0.1% in December 2021. More than a quarter of mortgage holders are expected to come to the end of cheap deals struck before this time – leaving millions of people facing a “mortgage timebomb” of higher borrowing costs.
Writing in a letter to the chancellor, the Bank’s governor, Andrew Bailey, warned the large share of households who were on cheaper fixed rate mortgages meant “the full impact of the increases in Bank rate to date will not be felt for some time”.
Luke Bartholomew, senior economist at investment giant abrdn, said Thursday’s hike in interest rates could be “an important milestone” towards recession, as higher borrowing costs sharply reduce disposable incomes.
Threadneedle Street had moved earlier this year to begin winding down its rate-hiking cycle, cutting the pace of interest rate increases from 0.5 percentage points to smaller quarter-point increases from March. However, the return to a tougher stance comes after several shock readings from the economy highlighted the risk of stubbornly high inflation.
The MPC warned there were signs of “second-round effects” setting in, as the initial inflationary burst seen in the wake of the Covid pandemic and Russia’s invasion of Ukraine become increasingly entrenched in the economy. It said this could be seen in both domestic price increases set by companies, and by pay settlements for workers being maintained at higher levels than was consistent with its 2% inflation target.
Although noting that some future indicators of pay growth and good prices had weakened, there had also been “recent upside surprises” to justify its tougher half-point increase.
… there is a good reason why not to support the Guardian.
Not everyone can afford to pay for news right now. That's why we keep our journalism open for everyone to read, including in India. If this is you, please continue to read for free.
But if you are able to, then there are three good reasons to support us today.
1. Our quality, investigative journalism is a scrutinising force at a time when the rich and powerful are getting away with more and more
2. We are independent and have no billionaire owner pulling the strings, so your money directly powers our reporting
3. It doesn’t cost much, and takes less time than it took to read this message
If you agree with our reader-funded model, and you can spare either a little or a larger sum, now’s the time to make an impact. Sustain open, independent Guardian journalism in perpetuity with $5 or more per month. Thank you.
Contribution frequency
Single
Monthly
Annual
Contribution amount
$3 per month
$6 per month
Other
Continue
Remind me in August
Topics
Interest rates
Bank of England
Monetary policy committee
Economics
Inflation
Mortgages
Borrowing & debt
news
Reuse this content
Most viewed
Business
Economics
Banking
Money
Markets
Project Syndicate
B2B
Retail
News
Opinion
Sport
Culture
Lifestyle
Original reporting and incisive analysis, direct from the Guardian every morning
Sign up for our email
Help
Complaints & corrections
SecureDrop
Work for us
Privacy settings
Privacy policy
Cookie policy
Terms & conditions
Contact us
All topics
All writers
Digital newspaper archive
YouTube
Newsletters
Advertise with us
Search UK jobs
Back to top
© 2023 Guardian News & Media Limited or its affiliated companies. All rights reserved. (modern)
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