Bank of England raises interest rates to 5.75%

The Bank of England’s Monetary Policy Committee today voted to raise interest rates by 0.25 percentage points to 5.75%.

In the United Kingdom, output growth has remained firm and appears to be evolving in line with the Committee’s most recent projections. Credit and broad money continue to grow rapidly. The pace of expansion of the world economy remains robust.

CPI inflation fell back to 2.5% in May. Lower gas and electricity prices mean that CPI inflation is likely to continue to fall back to around the 2% target in the course of this year. Although pay pressures remain muted, the margin of spare capacity in businesses appears limited and most indicators of pricing pressure remain elevated.

The Committee judged that, relative to the 2% target, the balance of risks to the outlook for inflation in the medium term continued to lie to the upside. Against that background, it further judged that an increase in Bank Rate of 0.25 percentage points to 5.75% was necessary to meet the 2% target for CPI inflation in the medium term.

Barry Naisbitt, Chief Economist at Abbey said: "Today's decision to raise base rates again by 0.25% to 5.75% was widely expected. The split vote of the Monetary Policy Committee last month clearly influenced the views of commentators in financial markets to expect a rate rise a little earlier than they had previously factored in.

"Concerns about the prospects for sustainably restoring inflation to its 2% target level into the medium-term, the robust pace of economic activity and the relatively rapid pace of monetary growth, are all likely to have played a part in today's decision.

"The key issues going forward will be how strong the economic data is over the coming months and how the MPC will view them in the light of its expectations for inflation into the medium term.

"The June inflation figure will be published soon and economists are expecting a further reduction from May's 2.5%, which the Bank of England would welcome after the inflation figures earlier this year."

Stephen Leonard, Director of Mortgages at Alliance & Leicester, said: “Today’s rate rise in many ways was a done deal given continued concerns echoing from within the MPC over inflationary pressures. In his recent Mansion House speech, Mervyn King reiterated that the committee was ‘determined to bring inflation back to target and keep it there’. For many borrowers, that means having to manage larger monthly mortgage payments and ensuring they have sufficient available to stand a further increase to base rate.

“The markets have already priced in at least one, if not two, further rate rises over the coming 12 to 18 months, which suggests the Bank of England will continue to move rates higher in order to bring inflation back to target in the medium to long term, if required.

“We do, however, expect to see increased levels of remortgage activity during September and October, as many borrowers coming to the end of their current scheme either seek to re-fix or restructure their mortgage to ensure that they are better placed to deal with any further increase to base rate. First-time buyers entering the market should continue to think seriously about a fixed-rate deal to ensure that they can get certainty around how much they need to pay each month on their mortgage.

“For those borrowers with greater financial flexibility, a base rate tracker mortgage still offers great value, as long as you are prepared to manage any potential increases in monthly payments.”