The Bank of England took further steps to bring down inflation today, with a bigger than expected hike to UK rates.

Analysts had been expecting a milder 25 basis point rise to 4.75% at today’s meeting but were surprised to find the BoE instead hiked rates by 50bps to a 15-year high of 5%. Markets also expect a further hike at the BoE’s next meeting in August and forecast rates to hit 6% by the end of the year.

UK Rate History Chart

Chart showing the UK’s interest rates for the past 25 years. Source: Trading Economics.

Today’s rate decision followed a shock UK inflation reading for May, with headline inflation stuck at 8.7%, failing to come down from the same figure for April. Even worse for the BoE however was that core inflation still rising, hitting 7.1% year-on-year, up from 6.8% in April. A 31-year high core inflation reading left the Bank of England with little choice but to hike, and seven of the nine committee members agreed that the 0.5%-point hike was needed to try and bring increasingly sticky inflation down.

High inflation and high interest rates are becoming a big problem for the BoE now, who are facing a lot of pressure and scrutiny from even the mainstream media and political parties. The mood is turning against the committee, who are being regularly criticised for being too late and too slow in raising rates, allowing inflation to become entrenched and now punishing the economy in their attempts to play catch up.

Much of the current concern over high interest rates is centred around the housing market, and mortgages are expected to rise even further following today’s hike. Two-year fixed rate mortgages have spiked above 6% this week and could climb above 7% by the end of the year if the current hiking cycle continues as expected. With households already struggling with rising prices, higher monthly mortgage payments could be the straw that breaks the camel’s back, sparking fears of a mortgage crisis to come in the months ahead.

Sterling has been volatile since the announcement was made. A large rate hike would typically result in a stronger pound, but reaction has been very mixed so far. Having initially spiked, the market consensus seems to be negative on the pound which has slumped from this week’s high above $1.28. Despite higher interest rates, most investors feel the UK is heading for a difficult period. Inflation still far above the BoE’s target, and rates now reaching painful levels for borrowing, makes a recession seem more likely, and Sterling seems a less appealing prospect.

Gold and silver had already seen weaker prices this week on the back of a stronger dollar, and had the pound rallied they could have fallen below £1,500 and £17.50 per ounce respectively. The pound's weakness means they are holding above these levels for now, but could fall further should the Fed and BoE continue to hike at their next meetings.