Bank of England raises interest rates by 0.5 percentage points

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The Bank of England has raised interest rates to 5 per cent, a surprise half-point increase, as the central bank and Prime Minister Rishi Sunak vowed to crush persistent inflation.

Sunak said he supported the BoE’s decision and warned Conservative MPs that tax cuts would have to be put on the backburner, as he promised to keep a firm grip on fiscal policy to control inflation, stuck at 8.7 per cent in May.

“Would I like to cut taxes tomorrow? Of course I would,” Sunak said at a press conference in Kent. “But borrowing loads of money to do things that sound great isn’t the responsible approach.”

Andrew Bailey, the BoE governor, was also uncompromising about the need to cut inflation. “We’re not expecting, we’re not desiring a recession, but we will do what is necessary to bring inflation down to target,” he said.

Voting 7-2 in favour of the rate rise, the BoE’s Monetary Policy Committee said on Thursday it was responding to “material news” in recent data that showed stronger inflationary pressures on the UK economy.

The BoE hopes its decisive move — taking rates to their highest level since 2008 — will demonstrate its determination to tackle inflation.

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“We know this is hard — many people with mortgages or loans will be understandably worried about what this means for them,” Bailey added.

“But if we don’t raise rates now, it could be worse later. We are committed to returning inflation to the 2 per cent target and will make the decisions necessary to achieve that.”

Chancellor Jeremy Hunt said the BoE “has my full support”. In a letter to Bailey, Hunt said the government would continue to align its fiscal policy with the central bank’s tougher monetary policy.

“This will require continued discipline on public spending and tax policy,” he added. Many Tory MPs have been pushing Hunt to cut taxes in his Autumn Statement ahead of a general election next year.

With its half-point increase — the 13th consecutive rate rise — the MPC defied the expectations of the market and most economists of a quarter-point move.

It will reinforce market movements over the past month that have prompted lenders to reprice fixed-rate mortgage deals in what has become dubbed a mortgage “time bomb”.

Borrowers on variable or tracker deals will probably see their monthly bills rise rapidly. For a borrower with a £200,000 mortgage over 25 years on a standard variable rate of 7.99 per cent, their payments will rise by £67 a month — or £800 a year — according to broker L&C Mortgages. 

Bailey said the decision to raise rates had been taken “in light of stronger resilience in the UK economy and further evidence of persistence in inflation”. 

Implementing such a large rate rise makes the BoE an outlier among other big central banks. Last week, the US Federal Reserve skipped a rate increase for the first time in more than a year, while the European Central Bank implemented a quarter-point rise.

A boost to sterling from Thursday’s decision faded quickly. Having briefly risen to $1.2838, up 0.4 per cent against the dollar, the currency traded down 0.25 per cent to $1.2735. UK government bond yields rose, with the two-year gilt yield up 0.03 percentage points at 5.08 per cent.

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The MPC made little comment on market expectations that interest rates would climb to a peak of about 6 per cent by the end of the year. Instead, it reiterated its commitment to tighten monetary policy further “if there were to be evidence of more persistent pressures”.

In the minutes of the MPC meeting, the seven members who voted for the large increase pointed in particular to inflation data and labour market figures over the past six weeks that had been significantly worse than they had forecast in early May.

Raising the interest rate to 5 per cent has already increased borrowing costs to a higher level than the BoE suggested would be the peak rate in its May forecasts.

The two members who dissented from the majority vote — Swati Dhingra and Silvana Tenreyro — voted to hold rates at 4.5 per cent. They said the effects of the rises already implemented “were still to come through”.