The Bank of England has hiked interest rates to their highest level since March 2009.
The Bank has raised its base rate by 0.25% to 0.75% after a unanimous decision by the Monetary Policy Committee (MPC).
The move will affect homeowners with variable mortgage rates who will see their monthly repayments increase, while savers will be hoping to be rewarded with an increase in the interest they can earn on money in the bank.
The FTSE 100 fell initially on the news and was trading down by 98 points, or 1.3%, at lunchtime. Some commentators have accused the Bank of making the wrong decision.
Jonathan Samuels, chief executive at Octane Capital, says: “The Bank of England has arguably put its reputation before the welfare of the average British household. While a quarter per cent increase won’t take home finances to breaking point, it will add to the pressure at a time when confidence is already low.”
Others say the long-awaited announced is a ‘damp squib’. James Newbery, investment manager at property investment site British Pearl, says: “Rates may have gone up but for Britain’s beleaguered savers it’s a major damp squib. Inflation continues to erode people’s money in real terms and this negligible uptick won’t be enough for savers to pop the champagne corks.”
Inflation is thought to be one of the main drivers behind the Bank’s decision to raise rates. The rate of inflation is running ahead of its 2% target, currently at 2.4%. A rising oil price could push this higher in the coming months. As well as that, the UK economy looks to be back on track, with economic growth of 0.4% in the second quarter of the year.
But the rate hike is widely expected to be a one-off, rather than the start of a series of increases.
Tom Stevenson, investment director at Fidelity International, says raising rates may be an “unnecessary risk”. He says that inflation has been softer than expected, wage growth is subdued and the UK economy faces significant Brexit-related headwinds.
He adds: “With all of this in mind, and for fear of unsettling the UK economy any further, the Bank has re-iterated that any future rate hikes are likely to remain at a gradual pace and to a limited extend. Because of this, I would expect this to be the only rate hike this year and possibly well into next year.’
Ben Brettell, senior economist at Hargreaves Lansdown, adds: “The Bank had backed itself into a corner this month, with markets seeing a rate rise as a dead cert. On balance, the Bank’s decision looks sensible – 0.5% was supposed to be an emergency level but that was almost 10 years ago.”