The Bank of England (BofE) has increased its base rate by more than many industry experts expected, taking interest rates to 5 per cent, the highest level in 15 years.

The increase marks the thirteenth consecutive increase in the base rate, after the Bank’s Monetary Policy Committee (MPC), which sets monetary policy to meet the 2 per cent inflation target, voted to increase the base rate by 5 per cent.

The committee this time voted by seven votes to two in favour of a 0.5 per cent hike, while the other two members voted to maintain the base rate at 4.5 per cent.

While industry experts had suggested that the BofE would increase the base rate by 0.25 per cent following the news that 12-month inflation had not reduced in May, the 0.5 per cent rise was more than expected.

Commenting on the latest increase, XPS Pensions Group suggested that the 0.5 per cent increase will add upwards pressure on short term bond yields, although it noted that the effect on longer terms yields is likely to be more muted.

XPS Pensions Group CIO, Simeon Willis, stated: “In general higher yields are having a beneficial impact on pension scheme funding levels, due to falling liability values.

"Longer term inflation expectations have been relatively stable in recent weeks so pension schemes and sponsors are generally benefitting from current conditions, but this should not be confused with a good news story. Better funding levels usually equate to more secure pensions for members."

However, Willis clarified that, in this instance the benefit of rising rates has come, to some extent, at a direct cost to members, whose benefits have lost real purchasing power.

“Some schemes may consider discretionary awards to compensate members, but many are not in sufficiently strong financial positions to consider this," she continued.

"The rise in interest rates that pension schemes have waited over a decade for, has turned out in many respects to be as dismaying as the low interest rate environment that preceded it.”

Indeed, Standard Life managing director for customer, Dean Butler, argued that while the rate increase will be good news for those whose savings outweigh their borrowing, he argued that it "comes as a real blow to anyone with debt", including the "significant minority" of retirees and those approaching retirement who still have credit cards or a mortgage to pay off.

“The costs are also likely to filter through to many of those who rent their property too. It’s difficult to believe how different things were until very recently – shockingly, rates only reached 1 per cent last May," he continued.

"The speed and severity of the change has taken everyone by surprise, and people who were financially comfortable in the spring of 2022 might now find themselves struggling and having to reassess their plans, particularly as rate rises have been coupled with double-digit inflation."

Butler also warned that those who were planning to retire in the near future but still have mortgages or other debts could face a tricky decision as the cost of borrowing continues to rise.

"The state pension by itself isn’t enough for a comfortable retirement even without housing costs or other debts, and many don’t have enough saved in private pensions to bridge the gap," he explained.

These concerns were echoed by PensionBee director of public affairs, Becky O'Connor, who argued that the increase will feel like a "death sentence to hundreds of thousands of mortgage borrowers with loans coming up for renewal".

She stated: "For people approaching or in partial retirement who still have mortgages, it could mean working for even longer or even increasing hours again.

"The upside for those who are about to retire with a decent enough pension pot and who want guaranteed income when they stop work is that annuity rates are relatively high and edging higher.

"Retirees or older workers with a lot of savings amassed could also enjoy higher savings rates on money held in cash accounts - but they will need to shop around for those rates, as not all banks and building societies are passing the increases on."

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