Home owners with mortgages face first interest rate rise for a decade


The pound dropped dramatically by nearly one per cent against the dollar in the moments after the Bank of England raised the base rate for the first time in 10 years.

For a £150,000 balance with a £675 payment, the increase will be £19.

This could hit some home-owners hard, given the popularity of variable rate mortgages in the United Kingdom, meaning the impact of a rate hike can be felt very quickly by households, which are already highly indebted.

With a mixed economic picture and the continued weight of political uncertainty about the progress of Brexit talks, many analysts are expecting a dovish, one-and-done hike from the Bank.

The Bank estimates that nearly two million mortgage holders have not experienced an interest rate rise since taking out a mortgage.

So it's clear why the Bank of England might have been tempted to at least try and put a floor under sterling.

Ian Kernohan, Economist at Royal London Asset Management, said that his base case is that the Monetary Policy Committee will raise rates "slowly" over the next two years, and only "assuming a Brexit deal is visible by mid-2018, unemployment remains low and global growth holds up".

For months, bank officials have been weighing up whether rates should rise to try and bring inflation back down, or if monetary policy should keep supporting a shaky economy.

When there is more demand for goods and services than there is supply, inflation tends to rise above 2%.

A reduction in interest rates makes saving less attractive and borrowing more attractive, which stimulates spending.

"This month's MPC decision is an important signal to the public that the era of very low interest rates is coming to an end". They also incentivise foreign investors to transfer their money to United Kingdom banks where it will earn more interest.

However, it is now mulling a gradual path of monetary policy tightening to combat inflation rising far above the central bank's 2 per cent target. The decision is controversial because the only reason to raise interest rates is to prevent the economy from "overheating", slowing down consumption.

Consumer Prices Index (CPI) inflation hit 3% in September - its highest level for more than five years - and the Bank has warned it could rise further still.

Sterling is set to remain volatile due to Brexit uncertainty.

Policymakers are now becoming less tolerant of surging inflation, given that the economy has performed better than feared since the European Union referendum.

This suggests the economy is stable and no longer in need of the emergency boost delivered by the Bank after last year's Brexit vote.

Economists said the rise was unlikely to have a big effect on the economy, because rates are still at the lows seen since the financial crisis.