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BoE increases interest rates to 4.75%

The Bank of England’s Monetary Policy Committee has increased interest rates to 4.75%, having held them at 4.5% for 11 months in a row.

Mark Blackwell, marketing director at The Derbyshire, says: “Today’s move in interest rates may have come as something of a surprise to the financial markets as the Bank of England was widely expected to keep the base rate on hold for another month.

“Most analysts have been anticipating an upward move at some point, but given the 7-0 vote at the previous meeting, the global uncertainty caused by the problems in the Middle East, the heavy oil/energy composition of inflation and the anticipated second half slowdowns in both the UK and US economies, a move upwards was not expected yet.

“Clearly, the MPC felt that the rise in inflation as measured by CPI warranted immediate action.

“Further upward moves are not anticipated given that the MPC has previously indicated that rates are perceived as near neutral and only needed a minor correction to rates to stay within inflation targets.”

Barry Naisbitt, chief economist at Abbey, says: “Today’s decision to raise base rates by 0.25% to 4.75% reflects a changing perception within the Monetary Policy Committee about the balance of risks on inflation, coming from new economic data.

While the decision to raise rates today was something of a surprise given last month’s unanimous vote to hold, it reflects economic news and, presumably, a revised outlook for inflation.

We will find out more details of the latter in the Inflation Report next Wednesday.

With economic growth again at 0.8% in Q2 and inflation now at 2.5%, I view the increase as an adjustment rather than the start of a new phase of raising rates.”

David Newnes, managing director of Your Move estate agents, says: First-time buyers have been struggling to get on the property ladder before todays announcement.

The 0.25% increase will put some potential buyers off making their purchasing decision, not just because of this rise which in real terms is quite small, but because any rate rise knocks confidence.

The market over the last six months has been healthy and steady, this weeks rate hike is totally unnecessary.

There is now a risk of the housing market slowing down, which is surely not what the Bank of England intended.

The reality is that property remains a very good long term investment and we need first time buyers to be able to come to the market with confidence, not worried about what will happen round the corner to interest rates.”

Mehrdad Yousefi, head of intermediary mortgages at Alliance & Leicester, says: “This month marks the anniversary of the last change to the base rate and the increase in rates today has been expected by many commentators in the market.

“This decision was probably influenced by recent strong data such as gross mortgage lending and GDP figures featuring against a backdrop of evidence of monetary tightening around the world, demonstrated by recent rate rises at the US Federal Reserve and European Central Bank.

“Home owners and prospective purchasers who are looking for stability in monthly payments can take advantage of the short term fixed rate deals currently available in the market and there are still plenty of competitive base rate trackers to choose from for those who prefer a variable rate mortgage.”

Andrew Montlake, partner at Cobalt Capital, says: Many commentators were uncertain as to the Bank’s decision, but it previously changed rates in August 2005 and August 2004 – no doubt hoping there would be less impact due to the fact many people, at this time of the year, are on annual leave.

With the Monetary Policy Committee a couple of seats light at present for various well documented reasons, it could be seen as an even more controversial measure to increase rates at this time.

With house prices picking up again in July, the annual growth rate, according to the latest figures from Nationwide, now stands at 5.9%.

Coupled with the fact that mortgage approvals in June rose to their highest level for five months, house price inflation is now higher than most predicted at the start of the year.

With good housing stock still low and demand high, this trend was expected to continue.

However, many commentators have predicted that even a small rise in interest rates could have a significant dampening effect on the housing market, and many will be holding their breath at the latest news.

Whether this does have a fundamental effect remains to be seen and many will be watching the MPC’s next move very closely.

As far as mortgages are concerned, lenders are gearing up for a busy second half of the year, with competition from new lenders reaching unprecedented levels; some lenders have already released incredible rates as low as 4.24%.

Matt Grayson, spokesman for Birmingham Midshires, says: The timing of the move has surprised the market.

Most commentators were expecting next month at the earliest.

However, The BoE’s main remit is to control inflation and it obviously felt that it needed to act sooner rather than later to ensure it is kept within its ideal limits.”

Milan Khatri, chief eccnomist at the Royal Institute of Chartered Surveyor, says: :The Bank of England’s decision to raise interest rates by a quarter of a percentage point to 4.75% today is not a surprise given the recent buoyancy of the economy and the housing market.

The residential property market has been in rude health in recent months with the Nationwide reporting a robust monthly rise in house prices of 0.8 % in July while statistics for Halifax still show house prices up by over 8% in the year to July.

Furthermore, mortgage approvals rose to 120,000 in June still well above the long run average and RICS estate agents confirmed that this trend continued into July.

The rise in interest rates comes against a backdrop of strongly rising employment and increasing spending on the high street.

RICS does not believe that this rise will have any immediate impact on the economy or the housing market.

However if interest rates were to rise further in the coming months, a slowdown in the housing market in 2007 is to be expected.

Jonathan Cornell, technical director at Hamptons International Mortgages, says: The long-anticipated base rate rise has finally happened as the Bank of England finally bows to inflationary pressures.

Clients on tracker or discounted deals will certainly see their monthly payments rise.

On a 200,000 interest only mortgage, payments will go up by 41.67 per month, not an earth shattering amount but potentially significant for those borrowers already over extended.

However, the effect is likely to be mainly psychological rather than financial. Whether this rise will be enough to cool the white-hot housing market remains to be seen.

Stuart Law, managing director of Assetz, says: “It is disappointing the MPC has raised rates again.

As a country we have already moved rates upwards in a timely manner in response to perceived inflationary pressures and other economic indicators.

This new rise is surely just a minor adjustment in a steady environment and we expect the next move to be down in due course.

“House prices are still growing and are bound to continue to do so whilst net household creation continues at such a pace compared to house building new-starts – it is just a question of supply and demand.

It is the economy that is most at risk from this rate rise when we already acted sufficiently through 2003/04 in raising rates.

Any further rise would damage consumer confidence and hamper our competitiveness.”

Adrian Coles, director general at the Building Society Association, says: “Although the BSA was expecting a rate rise before the end of the year, we are quite surprised that the MPC has raised the base rate in August.

This is especially due to recent strong consumption data being largely consistent with the Bank’s own forecasts.

The rise suggests that the MPC has made a pre-emptive move to counteract inflationary pressure.

“The BSA has, given the optimism in the housing market, reminded potential borrowers not to over commit themselves, as a rate rise was predicted.

However, even with the rate rise we believe that most people will continue to be able to manage their debt commitments.

“Indeed around half of all building society outstanding loans are at fixed rates, the highest proportion for a number of years.

These borrowers will be protected from the rate rise.

“The rate rise could be beneficial for savers as cash deposit accounts become more attractive.

It could also give people a wake-up call to put something aside in preparation for less certain economic times.”

David Bexon, managing director of, says: The Bank of Englands announcement today that interest rates are to be increased by 0.25% can only be bad news, shaking consumer confidence in the market and further hampering struggling groups such as first-time buyers and young families from stepping on to or moving up the property ladder.

Young families in particular are facing a continuous battle to progress in todays housing market.

Increasing the cost of borrowing only furthers their plight, with many young families forced to remain in inadequate and unsuitable housing as they are unable find or afford suitable family homes.

Ketan Malde, finance director of Heritable Bank, says: The rise in the Bank of England base rate is clearly good news for savers; those with variable rate accounts will benefit now from increased interest rates, although those seeking new fixed rates have already begun to benefit as the money markets had already factored in todays rise in the Base Rate.

Conversely, the rate rise is not so good for borrowers, although those on LIBOR-linked rates, often buy-to-let investors, should find that the rise in Bank Base Rate has little impact on their mortgage interest payments as the LIBOR rates had already anticipated the Base Rate would rise.

Trevor Kent, former president of the National Association of Estate Agents, says: “Oh dear, here we go again – no sooner has the house market shown signs of recovery then mortgage repayment costs are hiked.

All the talk of ’help for first-time buyers and essential workers’ comes to nought just as many commentators had predicted.

“Whilst a single lift in home buyers’ monthly costs may not in itself dramatically increase hardship and repossessions, if buyers interpret this as the beginning of a trend of rises, rather than an isolated correction, then the lifeboats might see some action.

Now would be a perfect time for the government to look again at specific help for first-timers, perhaps with a return to mortgage interest rate tax relief and roll-over schemes to enable parents to give money to children and grand children specifically for house purchase that avoids both Gift Tax and Inheritance Tax.

“A rise in mortgage rates is the last thing anyone relishes, but for the maisonette and studio brigade it could easily spell disaster.

Bob Pannell, head of research and information at the Council of Mortgage Lenders, says: “Today’s rate rise has been anticipated by the market for a number of months, and is in line with our forecasts.

While the rise might come as unwelcome news for hard-pressed borrowers, timely action by the Bank of England should limit the extent to which rate rises are needed in future.”

“Sentiment in the mortgage market is closely linked to interest rates, so in the coming months there is likely to be some moderation in the recent record levels of mortgage lending.

We have been forecasting this for some time.”


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