Cost-of-living crisis 'will get worse before it gets better' after interest rate hike

The UK's leading debt charity has warned that the cost-of-living crisis is set to deepen after the Bank of England (BoE) hiked interest rates in response to soaring inflation.

On Thursday, the BoE confirmed the base rate would increase to 1.25%, a 13-year high, and predicted inflation will surpass 11% by the end of the year.

Inflation is currently at a 40 year high after hitting 9% in the year to April 2022.

Read more: Cost of living crisis: How to save £2,000 on food bills

After the announcement, Richard Lane, director of external affairs at StepChange, warned the crisis facing households is likely to get even worse.

He further pointing to a Financial Conduct Authority (FCA) letter advising lenders to support customers in the aftermath of the rise as a sign that the situation would decline.

"Taken together, today’s rate rise and the FCA’s reminder to firms to treat their customers fairly suggest that the cost of living crisis still looks set to get worse before it gets better, even with the support measures that the government has so far announced," said Lane.

“We urge anyone beginning to experience financial pressure or debt problems to take action rather than simply hoping things will improve.

"Do talk to your lenders, and if that feels difficult or overwhelming then contact a reputable debt advice charity (you can do this online if you prefer)."

Read more: All the cost of living help available and how to get the payment

Danielle Richardson, content editor of Which? Money, warned that homeowners on variable mortgages will be among those feeling a new squeeze.

“This base rate increase will have an impact on mortgage holders and savers, at a time when money is tight for millions of households," said Richardson.

"Mortgage borrowers on fixed deals won’t see any change to repayments, but those on a tracker or variable rate mortgage could see their rates increase."

Interest rates have been at a record low for a number of years, with house buyers able to borrow at the lowest rates seen for decades.

However, the two million people are on variable rate mortgages and will now see payments go up.

Warnings have also started from economists on the impact increased interest rates will have on households.

Mia Fahnbulleh, chief executive at progressive think-tank the New Economics Foundation (NEF), criticised the Bank for hiking interest rates.

"The thing that is driving inflation are global supply side disruptions. It's the war in Ukraine, it's energy price shocks," Fahnbulleh told Sky News on Thursday.

She added: "So, by increasing interest rates, you're not actually solving the problem - but you do risk hitting families with mortgage payments and the cost of credit going up.

"But, critically, you also risk choking the economy at a time when we are projected to have the slowest growth in the advanced economies - where we're looking at the prospect... of recession."

Read more: Martin Lewis warning over 'crap savings' after interest rate rise

Rebecca McDonald, chief economist at the Joseph Rowntree Foundation (JRF), said that rising interest rates may signal more help will be needed from the chancellor in coming months.

"Difficult times ahead this winter, and likely inflation rate will be higher than this for lower-income families," said McDonald.

"If price rises ([especially in] Oct energy price cap increase) end up higher than was expected when [cost of living] support was announced in May, then sufficiency of package of support for lower-income households may need to be reassessed."

Read more: How the interest rate rise to 1.25% will affect mortgages