Interest rates increased by another 0.5% to 4% yesterday as the Bank of England continued the fight against inflation with its 10th increase in a row.

As well as the rates decision, governor Andrew Bailey says the UK’s expected recession will be shallower than forecast in November.

Mortgage holders, house hunters and savers will be affected by the Bank of England’s decision to increase the rate from 3.5% to 4%.

Homeowners on Standard Variable Rates or tracker mortgages will be hit particularly hard in the short-term by the latest interest rate increase.

The latest interest rate hike pushes up borrowing costs for the approximately 2.2 million people on a variable rate mortgage. More than a million households must renew their fixed-rate deals this year, and already face a jump in repayments.

Analysts suggest rates could peak at around 4.5% in the summer.

Industry reactions: 

Nathan Emerson, CEO of Propertymark:

“We of course are seeing challenges within the market as the cost of people’s mortgage payments are in some cases a lot higher than they have been traditionally used to.

“However, due to the demand for homes continuing to outweigh the number of properties available, this is fuelling a more stable market.

“With Banks stress testing people’s finances for many years, arrears and repossessions aren’t drastically increasing and we are therefore seeing a levelling out of the market and a return to more normal levels of housing transactions.”

Dominic Agace, chief executive of Winkworth: “Hopefully, this is now the top of the tightening cycle, with one more smaller increase expected before a cut later in the year. The interest rate had become detached from many people’s mortgage costs after the mini budgets and with fixed rate mortgage costs reducing this year and with private sector wage settlements at 7%, property affordability is improving. This has been reflected in a brighter then expected start to 2023, particular in cities amidst the return to work and in the flats market, being driven by increasing rental costs.”

Nick Leeming, Chairman of Jackson-Stops: “The base rate is fast becoming a financial football in which both the government and Bank of England are trying desperately to avoid an own goal. Today’s interest rate rise has been widely expected, demonstrating the Bank of England’s commitment to curb inflation and settle wider economic markets. The bigger question mark is whether this is the last significant rate rise for some time, enough to put inflation on a downward trend. The market will be hoping that rates now sit around this point for the immediate term, or until economic growth picks up, to allow mortgage markets to lean back into growth.

“Jackson-Stops’ national branch data points towards a more balanced market as we move further into 2023. Supply and demand levels are becoming much more closely aligned compared to the market extremes witnessed during the pandemic. Our branch data indicates that hotspots like Ipswich, Mid Sussex, Sevenoaks, and Woburn are seeing a steady growth in supply year on year, with consistent levels of viewings and offers agreed, indicating that the appetite for moving home will likely continue and peak again as we edge closer to Spring. Market conditions can vary from area to area, with some locations weathering economic headwinds with remarkable ease.

“For those about to remortgage or still trying to get on the ladder, there is no doubt that today’s rate rise will make for uncomfortable reading. However, as the lending market settles again in the coming weeks, alongside a growing sense that interest rates might have now peaked, this will allow buyers to plan their house move with greater certainty. In recent months the average cost of fixed rate mortgages has been continuing to come down from its peak. The “Safe Sunak” effect and distance from the aftermath of September’s mini-budget, has meant that market certainty is a much more likely path ahead.”

Antony Antoniou, CEO of Robert Irving Burns (RIB):

“There will be nothing ‘shallow’ about this recession if we continue to down this path, we will plunge headfirst into it. This latest rate rise presents a real risk to growth and paves the way for the IMF’s grim forecast to become a reality – setting the course to be the worst-performing major economy this year. 

“Inflation has passed its peak but on both an individual and corporate level, there is a collective belt tightening, with spending dramatically reduced and a focus instead on paying down debt. 

“Early green shoots in the property sector and renewed occupier demand are in danger of being wiped out by this unnecessary rate rise. The already burdened hospitality sector is again the canary in the mine, with a lack of disposable income and strikes driving customers away. We are also seeing weak retail sales on the high street taking the shine off the golden quarter and a wave of homeowners opting instead to pay off lump sum mortgage payments. ” 

Tom Bill, head of UK residential research at Knight Frank: 

“The size and direction of the bank rate movement is now less relevant for house buyers than the fact there is stability in the mortgage market. Fixed rates are edging down steadily but not significantly following the mini-Budget as the peak for borrowing costs gets nearer.

“Buyers and sellers switched off long before Christmas last year due to the volatility caused by the mini-Budget, but activity has recovered in 2023. Most buyers are needs-driven and have accepted the new normal for mortgage rates, which is supporting demand. The less negative message from the Bank of England on the prospects for the UK economy will help sentiment.

“The resilience of prices and sales volumes will be put to the test in the spring when larger numbers of transactions take place and by which time virtually no five-year fixed-rate mortgages below 4% will remain in the system. We expect prices to decline by 10% over the next two years as budgets get recalculated.

“A strong labour market, relatively low supply, and the fact more homes have been owned outright than with a mortgage in England since 2013 will keep upwards pressure on prices.”

Marcus Dixon, Director of UK residential research at JLL:

“Despite not all of the nine members of the Monetary Policy Committee being in agreement on rising rates in February, few would have said the further 50 basis point increase to 4.0% was a surprise. Yes, inflation looks to have topped out, but monthly falls in the rate are marginal and annual inflation remains in double digits. This base rate rise, the tenth consecutive increase, will add further monthly costs for those households on variable rates as well as those reaching the end of their current fix.

“Rates paid will be higher, but we continue to see fixed rates fall from their post mini-budget highs, with a handful of sub 4% rates now creeping into the market. This would suggest that banks expect further rises in the base rate in 2023 will be minimal, in line with expectations of rates topping out this year at 4.5% or lower. Yet even at sub 4% mortgage rates are considerably higher than those we have become accustomed to in recent years.

“This will, we expect, mean fewer moves in 2023, with transactions levels forecasts to fall by 30% on 2022 levels this year. But within the Bank’s statement there was some encouraging news on the outlook for inflation, with expectations that annual inflation (CPI) would fall to 3.9% in a years time, lower than previously forecast.”