Sunday, September 24, 2023

On June 22, 2023, the Bank of England (BOE) took a significant step by raising the benchmark bank rate to 5%, marking a substantial 0.5 percentage point increase. This decision brings the central bank’s rate to its highest level since 2008 and represents the most significant surge in three months. Coinciding with this development, the National Institute of Economic and Social Research (NIESR) published a study on the same day, warning that the heightened interest rates could lead to increased mortgage payments, potentially pushing 1.2 million households in the UK toward insolvency in 2023.

The BOE’s decision to raise the key bank rate to 5% was met with concern from NIESR researchers, who assert that it endangers the financial stability of 1.2 million households in the UK. In a blog post explaining their move, the BOE highlighted that inflation in the country had reached an unacceptable level, just below 9%. The central bank aims to achieve a 2% inflation rate and stated that this increase could lead to higher mortgage and loan payments for individuals.

The NIESR study, released alongside the rate hike, emphasized the potential consequences, with economist Max Mosley warning that millions of households with mortgages could be pushed to the brink of insolvency. Mosley also stressed that expecting households to weather such a significant shock would be unrealistic, suggesting that investment should be made in forbearance agreements that allow households and lenders to create mutually beneficial payment plans.

The NIESR research underscores the far-reaching impact of the Bank of England’s rapid rate increase since gaining independence in 1997. The study reveals that a substantial portion of the population, particularly those in Wales and the North-East, will bear the brunt of this economic upheaval, with their hard-earned savings at risk of depletion. According to NIESR, approximately 6% of households are projected to become insolvent by the end of the year due to rising mortgage repayments.

The BOE’s blog post acknowledges that those with fixed-rate mortgages will not experience any changes until the end of their fixed period. However, the central bank cautions that individuals with loans or mortgages tied to variable interest rates may see an increase in their repayment costs. Recent data from U.K. Finance indicates that around 17% (equivalent to 1.4 million) of outstanding mortgages in the UK operate on variable rates.

The impact of the Bank of England’s interest rate hikes on the overall economy and the financial well-being of households in the UK is a significant concern. Feel free to share your thoughts and opinions on this matter in the comments section below.

Frequently Asked Questions (FAQs) about interest rate hike

How does the Bank of England’s interest rate hike affect UK households?

The Bank of England’s interest rate hike can potentially push 1.2 million UK households towards insolvency. It leads to elevated mortgage payments and financial instability for many households.

What is the current benchmark bank rate set by the Bank of England?

The Bank of England raised the benchmark bank rate to 5% in its recent decision. This is the highest level since 2008 and represents a significant increase of 0.5 percentage points.

Why did the Bank of England raise the interest rates?

The Bank of England raised the interest rates due to concerns over high inflation in the United Kingdom. With the annual inflation rate hovering below 9%, the central bank aims to achieve a 2% inflation rate.

How will the interest rate hike impact UK households with mortgages?

The interest rate hike will result in higher mortgage payments for UK households. It is projected to push millions of households towards the brink of insolvency, making it challenging for them to maintain their financial stability.

Which regions of the UK are anticipated to face a heavier burden due to the interest rate hike?

According to the study by the National Institute of Economic and Social Research (NIESR), residents in Wales and the North-East are expected to face a disproportionately heavy burden as a result of the interest rate hike.

What can be done to help households and lenders cope with the impact of rising mortgage repayments?

NIESR economist Max Mosley suggests implementing forbearance agreements, which would allow households and lenders to create payment plans that are mutually beneficial and help mitigate the financial impact of rising mortgage repayments.

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