Fintechs comment: Bank of England hikes interest rate to 4.5%

The Bank of England has today (11th May 2023) raised its interest rate to 4.5%, its 12th consecutive hike and the highest it has been in almost 15 years. However, The Bank says that the UK economy will perform better than they expected this year, but admits it will take longer for inflation to fall, due to food prices remaining at an elevated level. But what does the finance industry think and what does it mean for consumers? We asked a range of financial service providers across the industry and here’s what they had to say.

Mohsin Rashid, CEO of ZIPZERO, said: “The Bank’s twelfth consecutive interest rate hike means more misery for the British people.

“Among those hit the hardest are homeowners with variable-rate mortgages, who will once again see their repayments surge. This comes as an estimated 700,000 households missed mortgage payments or rent last month. Undoubtedly, this decision will lead to inevitable repossessions.

“But it does not stop there: with inflation forcing many Britons to become increasingly reliant on borrowing to simply put food on the table – families will be forced to make more sacrifices.

“Households have shown a remarkable ability to adjust their shopping habits to reduce overall expenses. But the government must now act and provide a life raft for those struggling to stay afloat amid heavy price rises from every direction. In the meantime, I urge consumers to continue to find novel money-saving solutions that can reduce their spending and lower their bills.”

Joseph Calnan, Corporate FX Dealing Manager at Moneycorp, comments: “Today’s 0.25 rate hike is being billed by many as the last in what’s been a relentless cycle. But if indicators thus far are anything to go by, it’s difficult to justify an end to hikes in the current context, despite the implications for consumers and businesses.

In time, once the growth outlook is more upbeat and the medium-term inflation path shallower, the Bank of England can perhaps afford to switch to more infrequent rate hikes. But for now, with CPI stubbornly staying over 10%, further corrective action will be crucial – whether that’s through more rate rises or quantitative tightening.

The Bank of England has one job: reduce inflation to the Government’s 2% target. It must focus on doing it, whether that makes them popular or not.”

Commenting on rising interest rates and how managing inflation is like breaking a nut with a sledgehammer, Charles White Thomson, CEO at Saxo UK, said: “Managing inflation with the blunt weapon that are interest rates has always faced choreography issues, similar to breaking a nut with a sledgehammer. We are now in an economic danger zone, pincered between public enemy number one/ inflation, a 19% increase in food and non-alcoholic beverages which reaffirms the cost of living crisis, and a consumer saddled with outsized debt that was once cheap. The risk for further policy failure is real and the stakes are getting increasingly high.

“The conundrum facing the United Kingdom is more than just beating public enemy number one, or inflation, it is about defeating the high tax and low growth loop and the lovers of the status quo or managed decline. In an attempt to remove the politics and infighting, I prefer to continue referring to the UK as a PLC. My resounding conclusion from the UK PLC’s recent financial statement – or budget – is that the management team are in an unenviable position in that there is little wiggle room for large change. The UK PLC is effectively in a financial straitjacket with constraints including: £2.4 trillion public debt and all the servicing costs this entails, tax to GDP levels approaching record highs or 37.5% and corporation tax moving to 25% from 19% for financial year 2023/24. Financial outlook statements for generations of UK PLC management have concentrated on the status quo as opposed to a more dramatic plan to seriously kick start growth, confidence, and the all-important upside this brings.

“We have an advantage in that UK PLC is the sixth largest global company or economy in the world with all the scale and reach that this brings. This is about a bold and large plan to ensure that we deliver on its full potential and unleash the prosperity that a large part of the UK shareholders want. This would include making Brexit work, tackling the lack of productivity including the regional inequality gap which has entrenched itself since 2008, an overhaul of the corporate and individual tax structure making the UK a highly attractive place to do business, and having an open an honest debate about the sacred cows including the NHS. The alternative to a bold and wide changing economic plan, which is not purely based on industrially low interest rates and quantitative easing, is continued stagnation and underperformance. This will not be easy, but the alternative is to sell out the next generation which should never be a consideration.”

CEO of Kroo, Andrea de Gottardo, says: “To change the banking industry for the better, we provide customers with a fair rate on their current account with a straightforward, no strings attached experience that they deserve from their bank. It’s important for customers to be reading the fine print to understand what they’re really buying into and make an informed decision on who they’re banking with. Increasing trust from both an educational and regulatory standpoint improves consumers’ access to more competitive products, allowing them to feel more confident in the deal they’re getting long-term.”

Emma Hollingworth, Managing Director of Mortgages at MPowered Mortgages comments on Bank of England interest rate decision: 

“It is no surprise that the Bank of England has taken today’s decision to raise the base rate to 4.5%, the highest it has been since 2008. The ramifications will be felt throughout the mortgage market, and as such, there has never been a more critical time for buyers to seek professional advice.

“However, despite the rising interest rates, there remains healthy demand in the market, demonstrated by the 18% rise in loan approvals for house purchases between February and March and remortgage activity will be supported by the 1.4 million people with fixed-rate mortgages set to expire in 2023. Additionally, with inflation predicted to start coming down in the second half of the year, we are confident that the market will be able to weather the challenges presented by today’s interest rate rise.

“That being said, lenders and brokers must continue to work to understand the needs of their customers in a complex market, and to provide them with mortgage decisions as quickly and efficiently as possible. At MPowered Mortgages, our AI and data-driven process can rapidly process complex applications and support brokers in helping homebuyers to achieve their homeowning ambitions.”

Michael McGowan, Managing Director, Bibby Foreign Exchange: “Today’s interest rate rise is little surprise. Once again, the Bank of England is following the lead of the ECB and the Federal Reserve. Yet, despite this twelfth consecutive rate increase, UK inflation remains untamed. Businesses are facing higher borrowing and re-financing costs, and reduced capacity for growth – and their pain looks set to continue. While rates continue to rise, UK businesses could be forgiven for interpreting the MPC’s policy as ‘death by a thousand cuts’.

“The knock-on impact of this latest interest rate hike will also strengthen sterling, further compounding the challenges for businesses seeking new markets internationally. One thing exporters would do well to consider is how to best mitigate the risk of profit erosion by paying close attention to their foreign currency needs.”

Pete Hykin, CEO and Co-Founder at Penfold, a workplace pension provider, comments: “The interest rate hike by the Bank of England may be a painful experience for many individuals in the short term, however, it was widely anticipated and may signal the end of the upward trend in interest rates as inflation begins to decline. This decision has important ramifications for both savers and borrowers. Savers and borrowers should expect better returns, which is fantastic news considering the low-interest-rate climate of recent years. This decision may also cause the value of fixed income securities, such as bonds, to rise.

Borrowers with variable-rate loans, such as credit card debt and mortgages, may incur greater charges as a result of this move. While financial institutions may absorb some of the rising costs, borrowers may find it more difficult to repay their obligations when borrowing costs rise.

The overall impact on the economy is still unknown, as the decision may cause a halt in borrowing and expenditure, therefore affecting economic growth. However, it may also assist to reduce inflationary pressures, which have recently become a source of concern.”