Many believe small businesses will feel the full force of this decision
The Bank of England has chosen to up the base rate yet again, pushing interest rates to 5.25%, as of August 3.
The increase marks the 14th consecutive time the central bank has chosen to up rates, and represents a 15-year high.
But what do mortgage brokers make of it all? Is the decision justified? Or is it – as one suggested – close to “self-harm”?
Bank of England rate rise reaction
Hamish Anderson (pictured), chief executive at Money Mover, said while the latest base rate rise may have been expected, his heart sank for small businesses when the news broke.
“To continue to increase the base rate robotically seems like a futile act bordering on self-harm,” he added.
Anderson said the traditional economic rules are clear - you counter inflation by raising interest rates, this raises the cost of money, reduces consumer spending power and encourages suppliers to lower the cost of their products.
“However, it is a blunt instrument and the bank is overlooking unique factors that mean the traditional rules do not apply,” Anderson said.
The drivers of inflation, such as the war in Ukraine, the impact of Brexit and COVID, Anderson said, are beyond the reach of the tools the central bank has at its disposal. Raising interest rates in the UK will not cut the cost of fossil fuels or reduce the cost of trading with Europe, he noted.
Mark Grant, business finance adviser at The Business Finance Branch, agreed with Anderson that this latest rate increase is another serious body blow to UK businesses, as he believes it will get passed on in full and immediately to commercial borrowers.
“Non-bank lenders will see their own funding costs increase, so the end business borrower will see their cost of borrowing increase, too,” he added.
Grant said clients may start using business finance to afford the upfront costs of taking on new work and opportunities. This rate increase, he said, will stifle productivity, growth and business confidence, in turn affecting GDP and the wider economy.
Bank of England rate hike a step too far?
Andrew Montlake, managing director of Coreco, said the Bank of England seems hell-bent on inflicting further misery on mortgage holders and those with aspirations to buy.
“This further rise seems an unnecessary step too far, and we can only hope that the central bank now sees sense and pauses for breath as this, and previous rises, finally work themselves through the economy, before they cause any lasting damage,” he added.
The good news, Montlake said, is that SWAP rates have eased recently on the expectation that we are now very near, or at the peak of the current rate cycle, and although tracker mortgages will increase on the back of the latest decision, he believes we may well see fixed rates continue to ease slightly, especially as lenders look to get a better start to next year.
Montlake added that the next inflation report and subsequent words and actions from the Bank of England will be crucial.
“We know taming inflation is imperative, but to every action there is a reaction further down the line,” he said.
Riz Malik, director of R3 Mortgages, said the rate hike was anticipated, yet two members advocated for a more assertive approach, proposing a 0.5% increase.
“Given that there are three more rate decisions slated for the remainder of the year, we can likely expect additional hikes,” he said.
The fresh forecast projects that CPI inflation will resume its 2% target by the second quarter of 2025, which Malik said is a more extended timeline than initially projected. As such, he agreed with Montlake that the forthcoming batch of inflation data, scheduled for release on August 16, will provide some crucial insights into the likely economic trends for the rest of the year.
What is your perspective on the Bank of England’s latest base rate rise? Let us know in the comment section below.
