The Bank of England has raised interest rates by 0.5 percentage points to 5 per cent, a day after figures showed inflation remained at 8.7 per cent in May.
The central bank's Monetary Policy Committee has now voted 13 times in a row to raise rates, which are at their highest point in 15 years.
The rate increase was the sharpest since February, and double the figure that many economists had been expecting.
"The economy is doing better than expected, but inflation is still too high and we've got to deal with it," Governor of the Bank of England Andrew Bailey said.
"We know this is hard - many people with mortgages or loans will be understandably worried about what this means for them.
"But if we don't raise rates now, it could be worse later."
Caroline Wade is one of those worried people that Mr Bailey was referring to. A 43-year old mother living in Whitstable in Kent, she owns a small business and has recently found a new mortgage as her two-year fixed rate is about to expire.
The best deal that her mortgage broker could get her will cost her an extra £400 a month from August, as nearly half her income is swallowed up in mortgage payments.
"People are beginning to struggle," she told The National.
"Normal people with all the costs of their homes, running a car and childcare. It's just not sustainable. For the normal person who's got a decent job and a decent career, it just doesn't make sense.
"The government needs to be doing something. They're just interested in big business. You can see that with the prices in the supermarkets. Also, the electric and gas suppliers have had huge profits for years and years. Why should the normal average person be shouldering all these increases?
"It should be big business that's profited for years and years that picks up the bill, picks up the pressure."
'Big bazooka rate hike'
Following Wednesday's inflation report, analysts had said the chances of a 0.5 per cent hike today had grown considerably. Interest rates are predicted to reach 6 per cent by the end of the year.
“Expect more mortgage market mayhem after this big bazooka rate hike. Lenders were probably already pricing in a 25-basis-point move, but the repricing of home loans looks likely now to be more dramatic and protracted,” said Gary Smith, partner in financial planning at Evelyn Partners.
“With the benchmark interest rate undergoing a step-change to a level not seen since September 2008, the coming weeks are likely to see a procession of raised loan rates – and a succession of eye-watering estimates of how much monthly and annual loan payments will increase as borrowers come off their cheap fixed deals.”
Personal finance expert at Bestinvest Alice Haine noted that the Bank of England is “taking a more aggressive stance towards tackling high inflation despite the devastating effect this could have on mortgage borrowers.”
“Let’s hope this is not a case of unlucky number 13 with the move likely to exacerbate the panic already gripping Britain’s mortgage market.
“The split decision by the Monetary Policy Committee – with seven in favour of a 0.5 per cent rise and two preferring to stick with the status quo – shows the difficult balancing act the central bank is facing.”
The split in the voting illustrates a definitely more hawkish approach now favoured by the MPC. Although some analysts said the split was telling in itself.
“You do have to wonder as well why two members thought that the prudent thing to do was to keep interest rates on hold,” said Stuart Cole, chief macro economist at Equiti Capital.
“Given the uncertain economic outlook the UK is facing, you would prefer all members of the MPC to be singing from the same hymn sheet.”
Summer squeeze
Meanwhile, business group were quick to react to the rate decision.
“With further rises likely from the Monetary Policy Committee this summer, the squeeze on firms and households is set to intensify as they grapple with the highest borrowing costs in 15 years,” said Anna Leach, deputy chief economist at the Confederation of British Industry.
“In the months ahead, the MPC will be looking for evidence that inflation rates in services and wages in particular are slowing materially before calling an end to rate rises.
“Meanwhile, the extent of fixed rate mortgages in this tightening cycle increases the risk that rates overshoot. It is a delicate balancing act trying to ensure high inflation doesn’t become embedded in the economy while limiting economic damage.”
More from Rashmee Roshan Lall
The bio
Favourite book: Peter Rabbit. I used to read it to my three children and still read it myself. If I am feeling down it brings back good memories.
Best thing about your job: Getting to help people. My mum always told me never to pass up an opportunity to do a good deed.
Best part of life in the UAE: The weather. The constant sunshine is amazing and there is always something to do, you have so many options when it comes to how to spend your day.
Favourite holiday destination: Malaysia. I went there for my honeymoon and ended up volunteering to teach local children for a few hours each day. It is such a special place and I plan to retire there one day.
MATCH INFO
Who: UAE v USA
What: first T20 international
When: Friday, 2pm
Where: ICC Academy in Dubai
UAE currency: the story behind the money in your pockets
UAE%20v%20West%20Indies
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
UAE currency: the story behind the money in your pockets
