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The Bank of England raised interest rates to 5% through a surprise 0.5% increase as it aims to take control of persistent inflation. This 0.5% rate increase came as a surprise to the market which was widely expecting the BoE to follow the ECB’s recent 0.25% jump. Seven out of the nine Monetary Policy Committee members voted for the increase on the back of recent high inflation and weaker labour market figures. Raising rates to this new level has already taken interest rates over the forecasted peak from the BoE made back in May.

UK banks have agreed to give borrowers who fall behind on mortgage payments a 12-month grace period before repossessing homes. This agreement has been made after fears that the recent BoE rate rise will lead to unaffordable jumps in monthly mortgage payments for borrowers on variable rates which threatens the stability of the mortgage and housing market. With the UK market now expecting interest rates to peak at 6.25 per cent, the mortgage market is only going to be put under more pressure.

     The shares of UK banks fell late last week as recession concerns grew once again and the gains from rising interest rates seem come to an end for the banking industry. The fall in bank shares highlights the market’s concern over the credit quality of the debt issued by these institutions. Potential defaults coming over the next few months has been priced into the market while banks, such as Lloyds’, have been stressing the quality of their mortgage and loan books.