Interest rates: 5 per cent rise painful for many, says bank boss

Interest rates have risen by more than expected in a shock move as the Bank of England battles to slow soaring prices.

The Bank raised rates to 5% from 4.5%, the highest level in 15 years. Most analysts had expected a smaller rise.

“I understand the difficulty and the pain that causes for many people,” Bank of England governor Andrew Bailey said.

The move will lead to higher repayments for people with loans and many mortgage holders, but it should benefit savers if the rise is passed on.

Mr Bailey said that if the Bank did not raise rates now, “it could be worse later”.

“Many people with mortgages or loans will be understandably worried about what this means for them… but inflation is still too high and we’ve got to deal with it,” he added.

He warned that to get inflation lower, wage rises “cannot continue” at the rate they have been.

But he denied the Bank was trying to cause a fresh slump by putting up rates so sharply.

Following the Bank of England’s decision to increase interest rates from 4.5% to 5%, Scottish Labour Housing Spokesperson Mark Griffin said: “The chaos and incompetence of the Tory government has wreaked havoc on our housing sector and pushed hundreds of Scots to the brink with skyrocketing interest rates.

“This latest blow is no different. Thousands of Scots are likely to see their mortgage rates soar once again, and this economic chaos caused by the Tories is making Scots poorer every day.

“Unlike the Tories, Labour has a real plan to ease the pressure on homeowners with our mortgage rescue scheme that would provide a safety net for homeowners and help people struggling with rising payments.”

Mortgage rates have soared over the last year and a half:

Borrowing costs are also likely to rise. Currently the average annual interest rate is 21.86% on bank overdrafts and 20.13% on credit cards.

The dramatic move comes as the Bank tries to show it is in control of inflation, the annual rate at which prices go up, which was much higher than expected in May and far above levels seen in other countries.

Prime Minister Rishi Sunak is also under pressure to tackle the problem, having vowed to halve inflation by the end of the year.

On Thursday he said the job “has got harder” but added he was “totally 100% on it”.

“Rooting out inflation is not easy. It requires difficult decisions,” he said.

He added that people’s weekly shop had “gone up far too much” and the government would make sure supermarkets behaved “responsibly and fairly”.

In a letter to Mr Bailey, Chancellor Jeremy Hunt said he would meet regulators next week to discuss how it can make sure falls in wholesale costs are passed onto customers. It comes after supermarkets have been accused of making too much money from rising food prices.

However, they have denied profiteering, with the British Retail Consortium saying stores are working to keep prices “as low as possible”.

Shadow chancellor Rachel Reeves said families would be “desperately worried about what today’s interest rate rise might mean for them”.

Ewan Cameron bought a flat in London two years ago and has just managed to secure a new fixed-rate mortgage deal, but not before he had two mortgage offers pulled.

He has now got to find an extra £400 a month to pay for his home, and is considering renting out the spare room to help pay for it.

Matt Smith, a mortgage expert at property portal Rightmove, said the rate rise would not be “much of a shock” to lenders.

He said the Bank had opted for a large hike in part to reassure the financial markets – though it remained to be seen whether it would work.

“If today’s news does provide some reassurance, then we’d hope to see some stability return to the mortgage market which will help those looking to take out a mortgage this year to plan ahead,” he said.

There have been calls for the government to step in and help homeowners, but Mr Hunt and Mr Sunak have so far dismissed suggestions that ministers could intervene.

However, Mr Hunt is set to meet with banks on Friday as pleas grow for more to be done.

Labour has also said it would not intervene. But it has said the government should force banks to help homeowners struggling with mortgage payments, for instance by allowing them to switch to interest-only payments for a temporary period.

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