Bank of England: interest rates hit 3% after biggest hike for 30 years adding thousands to mortgages

Homeowners are set to pay thousands more on mortgage bills since as the Bank of England confirms its biggest single rate rise since the 1980s..

The Bank has raised the base rate of interest by 0.75 percentage points from 2.25% to 3%, in what is the eighth hike to interest rates in a row.

The rise will pile around £3,000 per year onto mortgage bills for households that are set to renew their mortgages, the Bank said.

Chancellor Jeremy Hunt said the government would focus on tackling the UK’s battered public finances to help limit the need for further big rate rises, but warned there were “no easy options”.

He said: “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.

“However, there are no easy options and we will need to take difficult decisions on tax and spending to get there.”

The Bank is also warning that the UK could be on course for the longest recession on record. From its highest to lowest point, gross domestic product (GDP) is expected to drop 2.9%, a much smaller decrease than the 6.3% drop seen during the 2008 financial crisis.

GDP could shrink for every quarter for two years, with growth only coming back in the middle of 2024.

The Bank also predicted inflation would peak at around 11% at the end of this year, while the unemployment rate could hit 6.4% by the end of 2025.

However, it cautioned that this forecast is based on interest rates reaching as high as 5.2%, which the Bank said it does not necessarily expect to happen. It added that it could be a drawn-out recession, but will be less than half as severe as in 2008.

‘Further interest rate hikes could come’

The Bank has warned that further interest rate hikes could be required to tame runaway inflation, after implementing the biggest single increase since 1989.

All but two members of the Monetary Policy Committee (MPC) voted to push up interest rates by 0.75 percentage points, from 2.25% to 3%, during a crunch meeting on Thursday (3 November).

One member of the nine-person MPC voted for a 0.5 percentage point increase, while another wanted a much softer 0.25 percentage point rise.

The Bank said further hikes could be necessary to pull inflation back to its 2% target, but it does not expect rates to rise as high as the 5.2% that the market has forecast for the final quarter of next year.

“The majority of the committee judges that, should the economy evolve broadly in line with the latest Monetary Policy Report projections, further increases in the Bank Rate may be required for a sustainable return of inflation to target, albeit to a peak lower than prices into financial markets,” the Bank said.

It also warned there are uncertainties and said that if inflation looks to be more persistent than the current outlook it will “respond forcefully”.

The pound fell after the Bank’s warnings over a prolonged recession. Sterling dropped 1.6% to 1.122 against the US dollar and was 0.7% lower at 1.15 euros.

Earlier this month, markets had predicted the interest rate increase could be as much as one percentage point, but this has calmed somewhat since the mini-budget was reversed and Liz Truss resigned as Prime Minister.

Mortgage rates soared after former Chancellor Kwasi Kwarteng delivered the mini-budget in late September, prompting many lenders to pull their mortgage products from the market.

Last month Bank of England Governor Andrew Bailey said it was likely the hike in interest rates could be bigger than the 0.5 percentage point increase to 2.25% seen at the previous meeting.