The Bank of England steps up its fight against inflation with its 13th interest rate hike – raising rates to 5.0 per cent

The Bank of England steps up its fight against inflation with its 13th interest rate hike – raising rates to 5.0 per cent

Last night, the Bank of England (BoE) raised its benchmark interest rate by a half percentage point to 5.0 per cent, the highest level in 15 years. When it comes to inflation, Britain remains an outlier compared with other major economies, with consumer prices rising 8.7 per cent in May 2023, four times the BOE’s 2 per cent target and more than double the rate in the U.S.

“The economy is doing better than expected, but inflation is still too high, and we’ve got to deal with it,” Andrew Bailey, Governor of the BoE, said. “We know this is hard – many people with mortgages or loans will be understandably worried about what this means for them. But if we don’t raise rates now, it could be worse later. If there were to be evidence of more persistent (inflationary) pressures, then further tightening in monetary policy would be required.”

That said, the minutes from the BoE meeting argued that inflation pressures will soon ease. Consumer price inflation “is expected to fall significantly during the course of the year”. Goods inflation should come down as “producer output price inflation has fallen very sharply in recent months.” Food price inflation is projected to fall from current levels of near 19 per cent.

Borrowers will be hit with two-year mortgage rates now tripling to more than 6 per cent in the past 15 months, promoting a mortgage “time bomb” for at least 800,000 fixed mortgages due to move on to significantly higher rates in the December 2023 half-year.

With the official cash rate for New Zealand (5.50 per cent), the U.S. (5.25 per cent), the UK (5.00 per cent) and Canada (4.75 per cent) now averaging 5.125 per cent, Australia seems like the “odd man out” at 4.10 per cent.  However, it is fair to say Australia’s mortgage time bomb is proportionally greater (3X the UK) with 880,000 fixed rate mortgages maturing this year.

Meanwhile, the ANZ-Roy Morgan Consumer Confidence Index for Australia has now spent 16 weeks below the mark of 80 – and the last time this happened was during the 1990-91 recession when the index was conducted monthly. 

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Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

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