The BoE has decided to raise interest rates to 5.75%. The rise was predicted, but many economists argue that with many home owners coming to the end of fixed rates arranged when rates were much lower, the real impact of the previous rises has yet to be felt.

A statement released by the Bank’s Monetary Policy Committee (MPC) claims that 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 according to the Bank. 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.

However, many believe a wait and see approach would have been best.

“It would have perhaps been more logical to wait at least for the next quarterly inflation report in August, as much of the impact of the previous the previous rise in Bank Rate to 5.5% only 2 months ago is still to become obvious,” said Ray Boulger of leading independent mortgage adviser, John Charcol of the decision.

“May’s mortgage lending figures showed an ongoing slowdown – even before the effect of May’s Bank Rate rise comes through - and the pain from a full 1 per cent rise over the last 10 months is still to impact on most borrowers with a fixed rate mortgage.”

Boulger believes that even without the further quarter point rise today there would in any case be a considerable negative impact on the housing market over the next couple of years, as a considerable number of borrowers - 4.5m households in total - with a 2 year fixed rate mortgage progressively have to refinance at higher rates than when they first took out a mortgage two or three years ago.

The rate increase is also likely to have a significant impact on the buy-to-let sector.

5 July 2007: Lee Grandin, Managing Director of Landlord Mortgages, the UK’s leading specialist buy-to-let broker comments on today’s Bank of England decision:

“Today’s base rate rise to 5.75% is a blow to many buy-to-let investors.

“With landlords still reeling from the rate rise in May, this second increase in two months will put further pressure on those who are coming to the end of their fixed rate mortgage,” says Lee Grandin, Managing Director of Landlord Mortgages.
“In the short term, the rate rise will see the immediate cash flow of the few landlords with variable rate mortgages reduced, as the difference between rental income and mortgage repayments dwindle.”

Grandin was keen to point out however that with rental yields set to remain strong and growth over the coming year, buy-to-let still makes for a very attractive investment option.