Economists have warned that Britain is now on course for recession – predicting the bigger-than-expected interest rise by the Bank of England yesterday will hit the economy hard.

The Bank’s decision to increase interest rates to 5% from 4.5% is a further blow to homeowners struggling with rising mortgage costs.

The Bank of England decided to lift rates for the 13th consecutive time after the latest data revealed that the cost of living increased by more than expected.

Inflation stood at 8.7% in May, the same level recorded in April, despite predictions it would fall further.

The latest rate hike makes the cost of paying back mortgages, other loans and credit cards more expensive but should mean people get a better return on your savings.

Industry reactions:

Tom Bill, head of UK residential research at Knight Frank said: “Inflation has replaced the mini-Budget as the single biggest headache for the UK housing market. As the financial pain increases for anyone buying or re-mortgaging, it will keep prices in negative territory and a lid on transaction numbers this year. That said, the wage growth that is driving core inflation higher is one of the reasons we don’t expect a steep decline in house prices. Record levels of housing equity, the availability of longer mortgage terms, a stable banking system, the political pressure on lenders to show forbearance and the recent popularity of fixed-rate products should prevent a collective cliff-edge moment for the UK housing market.”

“Meanwhile, rents continue to be forced higher by a lack of supply, which has been exacerbated by a number of landlords selling up in recent years. A series of tax changes have been politically expedient but economically damaging, with tenants paying the price as a growing number of property owners decide being a landlord no longer stacks up. Rising rates will only exacerbate this situation this year, and upwards pressure on rents is unlikely to relent any time soon.”

Matt Smith, Rightmove’s mortgage expert, said: “Yesterday’s inflation figures were disappointing, however today’s Base Rate rise won’t come as much of a shock to lenders who have already been increasing their fixed-rate mortgages sharply in anticipation of today’s rise.

“The Bank appears to have opted for a larger Base Rate rise this month than some commentators predicted to try and address the underlying issues driving inflation, and it continues to forecast that inflation will drop sharply in the second half of the year. Based on this message and the action taken today, we wait to see the impact this has on swap rates as this will have a direct impact on mortgage interest rates and whether or not we see further increases in the coming weeks. If today’s news does provide some reassurance to the markets, 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.

“Our real-time data still shows that more people are sending enquiries to estate agents to view homes for sale than at this time in 2019. We’ve also seen daily visits to our Mortgage in Principle service increase by 53% over the last month as more people look to understand what they can afford to borrow and repay on a mortgage. This indicates to us that for many people right now, higher interest rates are leading them to assess their budgets and what they can afford rather than put their plans on hold.”

Polly Ogden Duffy, MD at John D Wood & Co., said: “The announcement by the Bank of England to raise the interest rate from 4.5% to 5%, higher than the 0.25% increase that was anticipated, has perhaps triggered a sharper reaction than it will likely cause. Ultimately it should come as no surprise in a market that has come to expect steady increases in rates over the past few months and active participants in the market have been experiencing these challenges for some time now.

“As always, the impact of the rate rise will depend on the individual and their property motivations but it is more important than ever to seek expert advice when conditions are changing as rapidly as they have been. If you haven’t had advice in the last six weeks then you have to assume it is already out of date.

“As interest rates continue to rise and mortgage rates comes to an end, we are tipping the ballasts where we are seeing more and more landlords having to fund their buy-to-lets to break even. If these landlords can sell, chances are they will sell and that in turn will drive rents up due to less supply. It is hard to find many incentives to become a landlord with a mortgage in this environment.

“On a more positive note of opportunity, the reality is that if your home has dropped 10% and you are looking to upgrade your property, there has never been a better time. If you are an aspirational homeowner, it is fair to say that this a great ‘upsizer’s’ market for those that are bold.”

Matt Thompson, head of sales at Chestertons, commented: “We expect the rate rise to have an impact on overleveraged buy to let investors whose increased mortgage payments could lead to their investment making limited profit or even a loss. This could result in some landlords deciding to offload their assets. At this stage, we haven’t yet encountered homeowners who have been forced to sell up but, if rates continue to rise, some owners may be forced to review the situation and weigh up their options. At the same time, demand for properties in London continues to stay strong as the capital remains a hotspot for a variety of buyer demographics including international buyers.”

Nick Leeming, Chairman of Jackson-Stops, comments: “Just like the rain, inflation remains a persistent dampener for savers and mortgage borrowers. Just when we have a few days of sunshine and a moment of market reprieve, a storm soon brings us back down to earth.

“Today’s commitment to a 0.5% rise demonstrates just how determined the Bank of England is taking the need to curb inflation.

“In the same week that Michael Gove launched his book outlining Levelling Up 2.0, inflation stood firm at 8.7%. Renters, homeowners and housebuilders are all hoping for much clearer direction from the Government on what the future holds for the property market.

“Looking back over the last 20 years, it was in late 2007 that the UK saw 6% mortgage rates consistently average for two-year fix deals. It’s clear that the Government and Bank of England need to work much closely together in the coming few months to avoid unwanted consequences.”

Nathan Emerson, chief executive for Propertymark, said: “It’s undisputed that homeowners and first steppers will be facing the consequences of rising interest rates as borrowing costs increase. However, with this comes a further shift towards more realistic and sustainable house prices down from the spike seen during the pandemic.

“Confidence from sellers is undeterred with our latest data showing a 70% increase in properties available for sale compared to April 2022 and in turn, this is providing buyers more room for negotiation as well as more choice.”

James Forrester, managing director of Barrows and Forrester, commented: “It certainly seems as though the Bank of England has lost its grip on inflation and so they’ve continued to pile more misery onto borrowers with yet another rate increase.

“This will do nothing to revitalise what has become a rather weary looking property market in recent months and is sure to dampen buyer demand as lenders pass on this increase in the form of higher mortgage rates.”