The Bank of England has raised interest rates for a second time in three months to 0.5% as it warned that surging energy bills would push inflation higher than expected, to more than 7% by April.

The monetary policy committee was divided on whether to raise rates by 0.25% or by even more, with five members, including the governor Andrew Bailey, voting to increase rates to 0.5% and the other four opting for a bolder raise of 0.5% to 0.75%.

The rate setters said that a rise was needed to deal with “continuing signs of greater persistence in domestic cost and price pressures”.

Although the market had already priced in yesterday’s interest rate rise to 0.5%, analysts expect rates to hit 1% by the summer and 1.25% by the end of 2022.

Property industry reaction:

Iain McKenzie, CEO of The Guild of Property Professionals, commented: “At a time of already rising bills, and on the same day that consumers have been hit by the most brutal energy price hike in recent years, an interest rate rise is unwelcome news to most.

“Those on tracker mortgages or variable rates will feel an immediate squeeze but there’s some breathing space for the vast majority of homeowners who are on fixed rate mortgages. Many of these owners, however, will be keeping a close eye on rates because these fixed-term deals will need renewing eventually. Around 1.5 million fixed-rate are expected to end this year and next.

“The rise in interest rates could put the brakes on the house price boom we’ve seen in the past 18 months, despite Nationwide recently announcing the fastest growth rate for a January since 2005. Prospective buyers will have to balance their finances more carefully if costs rise and price growth doesn’t cool as quickly as expected.”

Lucian Cook, head of residential research at Savills, commented: “This will put a bit of a squeeze on household finances and affordability. However some of the underlying economics of the housing market remains on hold: it’s currently less about affordability and more about supply and demand, and the extreme shortage of stock and high levels of demand will likely sustain some further house price growth, particularly given the high levels of equity in the market.

“The rise will be a signal to homebuyers that rates will inevitably rise and that this may now happen earlier than anticipated.  Whether or not the Bank of England now eases back on mortgage regulation is now a more pressing question for more highly leveraged buyers.

“The mortgage market remains very competitive and lender margins have tightened over the course of the pandemic.  As such, we could see today’s rate rise passed on to borrowers in full.

“We stand by our forecasts of average 3.5% house price growth across the UK this year, likely weighted towards the first half of the year.”

Tim Bannister, Rightmove’s director of property data, commented: “The level of demand we’re seeing from home buyers at the start of the year suggests the rise in interest rates is unlikely to dampen the motivation to move. We’ve seen a real desire from both sellers and buyers to take action and move at the start of this year, and this is likely to outweigh the impact of an interest rate rise on house prices, at least in the short term.

“While the majority of Britain is on a fixed rate mortgage, for those on a tracker mortgage pegged to the Bank of England base rate, the rise to 0.5% could mean in the region of £40 extra* each month for the average home. An interest rate rise so soon after the last may prompt some in this group to look at fixed rate deals now if they can, or when their current deal ends, in case rates rise further in the near future.

“For those looking to buy a first home, it’s important to remember that interest rates are still at a level well below historic norms, and there are still many competitive mortgage products out there.

“In the rental market, landlords might be wary of passing the effects of an interest rate rise onto their tenants due to high average asking rents across Great Britain right now. Landlords are currently seeing increased rents after the pandemic, and there is a limit to what tenants can afford or are prepared to pay.”

Dominic Agace, chief executive of leading estate agents Winkworth, said: “With a very busy start to 2022 for the housing market and rates still at historic lows, I don’t see this is going to affect activity, but one hopes it will slow inflation.  The balancing act by the BoE is well under way.”​

Managing Director of Barrows and Forrester, James Forrester, said: “Before we head for the hills, it’s important to note that this is only the second interest rates increase since August 2018 and we’re a far cry from the apocalyptic double-digit rates of the late 80s and early 90s.”

“The market has arguably never been better for those looking to borrow and it will take far more to derail the freight train of house price growth seen over the last two years.”

Michael Bruce, CEO and founder of Boomin, said: “With recent figures showing inflation is at a thirty year high, a swift response from the Bank of England was only to be expected and there’s a good chance it’s not the last we’ll see this year.

“This will no doubt bring cause for concern for those on a variable rate mortgage who could now see their monthly mortgage costs start to climb. With many already feeling the squeeze due to the increased cost of living this could bring further financial turmoil and so now is the time to act if you feel this is the case.

“While a fixed-rate term won’t remain in place forever, it will bring a good deal of certainty and relief in the short to mid-term. 

“The government needs to act to ensure that there is a healthy property market to stimulates the health of the wider economy. We cannot afford to allow inflation and interest rates working in tandem to slow the property market and reduce home mover confidence.”

Director of Benham and Reeves, Marc von Grundherr, said: “Another marginal increase in interest rates is unlikely to dampen the house price party that UK homebuyers have been enjoying since the beginning of the pandemic and while the general expectation is that they may hit one per cent, this won’t materialise until the end of the year at the very earliest.

“We expect a strong level of foreign demand to return to the market in 2022 and this will also help boost the market considerably regardless of what happens with interest rates.

“Many foreign buyers, particularly across Asia, tend to finance their investments with banks closer to home, in Hong Kong or Malaysia for example. So UK interest rates won’t have a huge influence on them as most are already paying around three to four per cent and are happy to do so.”

Stuart Law, CEO of Assetz, said: “The Bank of England’s decision inches us slightly further away from record lows, but it doesn’t call time on low-cost mortgages just yet. In historic terms, 0.5% is still incredibly low and I don’t expect rates to go above 1% this year as the government strikes a fine line between promoting economic recovery, supporting key markets, and protecting household incomes. Of course, this is going to hurt some homeowners who may already be struggling with affordability but, for the vast majority, the impact their mortgage has on their overall household finances will be small.

“The Bank has moved us away from rock-bottom mortgage costs, but I believe the approach to interest rates will be incremental and cautious given the fragility of the economy. This will continue to support low-cost borrowing and prop-up both demand and pricing in the housing market for now.”

Simon Gammon, managing partner at Knight Frank Finance, said: “Borrowers on variable rates will see an almost immediate increase in their outgoings amid a worsening cost of living squeeze. Variable rate mortgages account for about a fifth of all mortgage debt, or about £300 billion.

“More broadly, mortgage rates have been ticking upwards since late 2021 but remain exceptionally low by historic standards. There has been some movement since December’s hike, but not a lot. Lenders begin the year with new targets, eager to build market share, which has given borrowers a temporary reprieve.

“Rates will inevitably rise over the coming months. How much depends on whether today’s hike has the required dampening effect on inflation, but it’s highly likely we’ll see more base rate rises over the course of the year. That will transform pricing in the mortgage market and those that don’t act soon will wish they had done in only a few months.”