More mortgage pain for homeowners as the Bank of England prepares to raise interest rates from 4% today after a sudden spike in inflation – but how high will they go?
- The Bank of England will announce its latest interest rate decision this afternoon
Homeowners face more pain today as the Bank of England prepares to raise interest rates again.
The core rate is expected to rise from 4 percent when the decision was announced at noon, with a potential of 0.25 points in the eyes of analysts.
Markets were divided on whether Threadneedle Street would continue for 10 consecutive increases, with the aftermath of the Silicon Valley bank collapse and Credit Suisse crashing the market jitters in a big way.
However, yesterday’s surge in inflation, with the consumer price index rising from 10.1 per cent to 10.4 per cent in the year to February, added pressure on the Bank.
The US Federal Reserve also went ahead with a 0.25 point gain overnight, meaning traders will be surprised if UK prices don’t follow suit.
The rise could bring the base rate closer to pre-credit crunch levels, tightening pressure on families already struggling to deal with the cost-of-living crisis.
Inflation was expected to continue its downward trajectory in February, but the pace of prices has already picked up again.
The higher CPI was driven by a shortage of salads and vegetables along with the higher cost in restaurants and bars.
The Bank of England raised interest rates from 3.5 per cent to 4 per cent last month
Homeowners face more pain today as the Bank of England prepares to raise interest rates again (pictured, Governor Andrew Bailey)
Earlier this week, markets were betting that there was a 50/50 chance the bank rate would stay at 4 percent, but after the inflation figures, a quarter-percentage-point increase was seen as 95 percent certain.
In Budget last week, Jeremy Hunt presented the Office for Budget Responsibility (OBR) forecast that inflation would fall to 2.9 per cent by the end of this year.
But the chancellor said yesterday: “Low inflation is not inevitable, so we need to stick to our plan to halve it this year.”
The pound rose more than a cent against the dollar, hitting $1.23 – its highest level since early February – in the hours after the figures were released on rising expectations of a rate hike.
Paul Dales, chief UK economist at Capital Economics, said: ‘An acceleration in CPI inflation in February could be enough to tilt the Bank of England towards a 4 per cent hike to 4.25 per cent tomorrow despite the recent turmoil in global banks. System.’
Inflation jumped to a four-decade high of 11.1 percent last year after the acceleration of a price spiral that had already begun as a result of Russia’s invasion of Ukraine, driving up energy costs.
Interest rates have risen sharply as the Bank of England strives to bring inflation back towards its 2 per cent target – although some members of the rate-setting committee have recently argued that signs of inflation ebbing over the coming months mean it should pause.
Craig Erlam, chief market analyst at OANDA, said the inflation figures came as a “death blow” to the bank.
“Whatever flexibility the Bank of England might have thought it would have on Thursday was decimated by the inflation data on Wednesday morning and once again the topic of conversation turned to whether 0.25 percentage point would be enough,” he said.
He added that “there is no justification for a temporary pause” in raising interest rates, “even against the background of financial stability concerns and the spillover effects of aggressive interest rate hikes.”
ING Economics suggests that the BoE will want to see more evidence that inflationary pressures are easing more broadly before ending the rate hike cycle.
Jeremy Hunt (pictured yesterday) presented the Office for Budget Responsibility (OBR) forecast that inflation will fall to 2.9 per cent by the end of this year
ING experts also expect an increase of 0.25 percentage point, but said it may be the last rally before prices fall again.
Meanwhile, Investec Economics agreed that a worse-than-expected inflation reading would make the MPC’s decision more difficult, but expected the bank to opt for a ‘wait-and-see approach’ and keep rates at 4 percent while assessing the situation. .
“In determining the appropriate level for the bank rate, the MPC will have to assess which is the lesser of two evils: the risk of higher inflation for longer or the current threat to financial stability stemming from rapidly evolving fears of a banking crisis,” said Eli Henderson, economist at Investec.
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