Despite inflation looking set to ease steadily, many economists had anticipated that the Bank of England would put a halt to its string of interest rate increases but following on from last month's 0.5 percent base interest rate rise, the BOE has today increased rates by a further quarter of a percent to 4.25 percent.
The unexpected surge in inflation figures from February has caused the Bank of England is anticipated to increase the interest rate for the 11th time in under 18 months. The decision comes as the Bank attempts to balance the UK's struggling economic outlook with the global banking crisis.
Markets were already predicting the 0.25 percentage point increase to 4.25% yesterday and it seems that raising the Bank rate will be a part of a range of measures aimed at reducing inflation, but the increase will add further pressure on the cost of living.
An increase in base interest rates from 4 percent to 4.25 percent would have a direct impact on the average mortgage holder in the UK. With a rise in interest rates, the cost of borrowing money for mortgage repayments increases, leading to higher monthly repayments for homeowners.
With a base interest rate increase of 0.25 percent, the average mortgage holder not on a fixed rate in the UK would have to pay an extra £12.50 per month on a £100,000 mortgage. This may not seem like a significant amount, but it can add up over the course of a year, resulting in an additional cost of £150 on a £100,000 mortgage.
If the base interest rate continues to rise, it can lead to a significant increase in the cost of borrowing for mortgage holders. This could result in many homeowners struggling to make their mortgage payments, leading to an increase in the number of home repossessions.
Though the reason for the Bank of England to increase rates is to curb inflation, will it actually lower energy costs, fuel costs and the cost of food, which are the main inflationary items in the basket?
Yesterday, the US Fed also raised its main rate by a 0.25% but also stated that it is forecast to hold rates steady from this point.
Last week, the European Central Bank increased its three primary interest rates by 0.5 percent, despite the ongoing financial market disturbances surrounding the fall of Silicon Valley Bank and the turmoil at Credit Suisse.