12:34 pm, June 22, 2023
The Bank of England has raised interest rates to five per cent – a half a point increase – in a shock move today.
It means policymakers at the Bank have now set rates at their highest for 15 years.
The moves comes amid stubborn inflation figures that this week showed, in May, the Consumer Prices Index inflation (CPI) was 8.7 per cent, compared to the 8.4 per cent experts had forecast.
The rising cost of used cars was one of the factors that helped keep inflation high.
ONS chief economist Grant Fitzner said: ‘After last month’s fall, annual inflation was little changed in May and remains at a historically high level.
‘The cost of air fares rose by more than a year ago and is at a higher level than usual for May.
‘Rising prices for second-hand cars, live music events and computer games also contributed to inflation remaining high. These were offset by a fall in the cost of petrol.’
The 0.5 percentage point increase was the sharpest since February, surprising economists who had been expecting a smaller hike of 0.25 per cent.
Seven rate setters – including the Bank’s governor Andrew Bailey – voted for the increase. Two thought rates should remain unchanged.
Bailey said: ‘The economy is doing better than expected, but inflation is still too high and we’ve got to deal with it.
‘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.’
The rise will impact those on tracker mortgages, pushing up the costs of monthly repayments. While this isn’t felt as dramatically as in the past with many home owners on fixed rate deals, it will push up the costs dramatically when they come to renew.
Higher interest rates are designed to make consumers save more and spend less, pushing down inflation as demand reduces. The Bank is tasked with keeping inflation below two per cent.
The chancellor Jeremy Hunt has said the government will stick to its guns’ and wants the public to remain patient. Meanwhile, the Prime Minster has said halving inflation is his ‘number one priority’.
Sunak said: ‘I feel a deep moral responsibility to make sure the money you earn holds its value.
‘That’s why our number one priority is to halve inflation this year and get back to the target of two per cent.’
Auto Trader’s director of automotive finance, Rachael Jones, said the impact of the rises need to be put into context.
She said: ‘For those looking to buy a new or second-hand car on finance, it’s worth putting the increase into context in terms of monthly payments.
‘While the recent increase in interest may well add several hundred pounds to the average mortgage each month, compared to last year, the average used car has only seen an £8 a month rise due to rising interest rates.’
She also said rising interest rates weren’t impacting demand on the Auto Trader platform.
She added: ‘On our marketplace, the growth in rates is having no effect on consumer demand.
‘With average used car prices up around £3,500 in just two years, more drivers than ever are considering finance to help fund their next set of wheels.
‘Despite the current average second-hand car APR reaching 11.4 per cent, the number of people using our finance calculators has increased 15 per cent on last year.’
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Additional reporting: PA Media
