Homeowners faced increase domestic costs misery today as the Bank of England confirmed the largest increase in interest rates in more than 30 years - and the longest recession since records began a century ago.
The Bank of England hiked the rate by 0.75 percentage points to 3 per cent at lunchtime, potentially adding hundreds of pounds to unfixed monthly mortgage payments.
Interest rates are now the highest they have been since the Global Financial Crisis in 2008 after the 7-2 decision by the Monetary Policy Committee (MPC), the eighth rise in a row.
The increase, which followed a similar announcement by the US Federal Reserve last night, is the largest daily move since Black Wednesday in 1992 and the largest single increase since 1989.
Central bankers want to get a grip on runaway inflation which is battering British households. More than 1.5million households, who are on tracker or standard variable mortgages, will feel the pain instantly as the base rate rise filters through. Borrowers with a £200,000 standard variable mortgage could see their repayments jump by more than £1,000 a year if the Bank raises rates to 3 per cent.
The mammoth move came as the Bank predicted a two-year recession for the UK - the longest since records began in the 1920s - stretching far beyond its previous forecast of 15 months.
This started in the third quarter of 2022, and will last until mid-2024. By 2025, the Bank forecast, unemployment will have leapt from 3.5 per cent now to 6.5 per cent.
Bank of England governor Andrew Bailey warned it was a 'tough road ahead' for the UK and households.
He acknowledged that eight rate rises since last December are 'big changes and they have a real impact on peoples' lives'.
But he said: 'If we do not act forcefully now, it would be worse later on.'
However, he added: 'We think Bank rate will have to go up by less than is currently priced in by financial markets.'
This means that 'fixed rate mortgages should not need to rise as much as they have done', he added.
Karen Ward, a member of Chancellor Jeremy Hunt's economic advisory council, predicted this morning that interest rates will reach 5 per cent over the next few months.
In an attempt to soothe families' fears, the Bank pushed back against these expectations, saying that it did not think it its nine-strong Monetary Policy Committee (MPC) would hike rates that far.
In the minutes of its latest MPC meeting, it said: 'Further increases in Bank Rate might be required for a sustainable return of inflation to target, albeit to a peak lower than priced into financial markets.' But it did not offer a prediction as to how high its base rate will get.
It comes ahead of the Chancellor's Autumn Statement on November 17 in which he is expected to introduce swingeing tax rises and spending cuts.
Mr Hunt today said: 'Inflation is the enemy and is weighing heavily on families, pensioners and businesses across the country. That is why this government's number one priority is to grip inflation, and today the Bank has taken action in line with their objective to return inflation to target.
'Interest rates are rising across the world as countries manage rising prices largely driven by the Covid-19 pandemic and Putin's invasion of Ukraine.
'The most important thing the British government can do right now is to restore stability, sort out our public finances, and get debt falling so that interest rate rises are kept as low as possible.'
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