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Interest rates: What the Bank of England's biggest hike in 33 years means for you

Interest rates: Governor of the Bank of England, Andrew Bailey.
The bank of England is set to opt for a 0.75 percentage point rise with a split vote on interest rates on Thursday. Photo: Press Association.

The Bank of England (BoE) is set to increase UK interest rates by 75 basis points on Thursday, its biggest hike in 33 years.

Financial markets are anticipating the record rise, the size which has not been seen since 1989, as the central bank battles soaring inflation. A 0.75% rise will bring the BoE base rate to 3%.

However, a split decision on the scale of the hike is expected in light of a pending recession, with some members possibly opting for a smaller 0.5% increase.

Economists have also pointed out that there will be calls for less aggressive monetary tightening going forward due to weaker growth momentum.

Read more: Interest rates: How BoE's rate hike will impact mortgages and house prices

Analysts at Deutsche Bank (DB) have said they expect Threadneedle Street to opt for a 0.75 percentage point rise with a split vote.

“We expect the MPC, including the governor at the press conference, to stress that while the bank remains fully committed to fighting off excess inflation, it will attempt to avoid an over correction in rates that would set the economy back further from its pre-pandemic levels,” Sanjay Raja, chief UK economist, said.

Deutsche Bank now expects the bank rate to reach 4.5% by May next year, down from its previous projection of 4.75%.

Meanwhile global financial services firm Ebury said future communications around rate hikes will be key to the reaction of the pound.

“The MPC has a recent track record of surprising to the dovish side, and we believe that market participants may well be disappointed once again,” Matthew Ryan, head of market strategy at Ebury, said.

“A 75bp rate hike is our base case scenario, though we expect a split vote, with a handful of members in favour of a smaller rate increase. Given current market pricing, another half a percentage point move would be unequivocally bearish for the pound, regardless of the bank’s accompanying communications.

“We think that even in the event of a 75bp rate hike this week, sterling could sell-off should the bank signal a more gradual pace of tightening ahead.

Watch: How does inflation affect interest rates?

It comes as BoE governor Andrew Bailey has already pointed to a more hawkish move as UK inflation rose above 10% for the second time in 2022 in the year to September.

Last month he said: “As things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August.”

The Office for National Statistics (ONS) recently revealed that the consumer prices index rose to 10.1%, returning to double digits after a slight dip to 9.9% in August. City economists had forecast a slightly smaller rise to 10%.

It came amid the sharpest annual rise in food prices for more than 40 years, with food and drink prices the biggest driver behind the cost of living increase.

Read more: Inflation: Milk, tea bags and sugar prices soar as food bills hit record highs

The Monetary Policy Committee (MPC) has been battling runaway inflation this year with the aim to bring it back down to its 2% target. It has raised interest rates from record lows of 0.1% during the COVID pandemic to the current 2.25% rate.

So what does it mean for you:

Mortgages

A November rise will be the eighth consecutive jump in interest rates by the UK central bank, meaning that households will be under further pressure from ballooning mortgage costs.

Any move higher will have an immediate knock-on effect for mortgage holders with tracker or variable rate trackers that move in line with the BoE base rate.

According to Rightmove, the average home in London now costs £664,400, compared with the national average of £354,564, meaning owners in the capital will suffer the most when interest rates go up.

Separate data from UK Finance also showed that there are more than 1.5 million households on tracker and variable rate mortgages, with the average bill expected to rise by more than £800 a year.

Read more: FTSE and European markets rise as investors await the Fed's interest rate decision

UK Finance had estimated that the average household on a tracker mortgage will see their monthly repayment rise by £73.49 per month – equating to £881 annually.

The average standard variable rate mortgage repayment will increase by £46.22 per month, or £554.64 annually.

“The spike in mortgage rates in tandem with rampant inflation have pushed many wannabe buyers to the sidelines. Even those able to raid the ‘Bank of Mum and Dad’ to bump up their deposit might struggle to afford mortgage repayments,” senior personal finance analyst at Interactive Investor Mryon Jobson said.

“The plight of those making a second rung of the property ladder is also important as they are living in homes that many first-time buyers seek to purchase.

“Runaway property prices and rising mortgage rates have left many of these so-called second steppers struggling to trade up to a bigger home.”

Watch: How to save money on a low income

Savings

Increased interest rates usually comes as good news for savers, however, a rate rise on Thursday is unlikely to provide an overnight hike where rates jump significantly.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: "With the big high street banks stuffed full of lockdown savings, they’re happy to continue offering miserable rates – typically under half a percent. It means it’s up to the smaller, newer and online banks to bump rates up

"They don’t want a vast amount of new cash, and they don’t want to pay more than they have to for it, so they’re likely to continue nudging rates up a fraction at a time. The rate rise is likely to mean the upwards shuffle continues, rather than providing any particularly dramatic acceleration."

Read more: FTSE 100: Next posts higher sales despite cost of living squeeze

Credit cards and borrowing

A rate hike is also bad for borrowing as those with debt, loans or credit cards may actually end up worse off due to higher interest payments.

"The amount consumers are borrowing has increased 5% vs this time last year, however we have seen a 4% decline vs earlier this year, which is an indication of used car prices levelling, as well as customers affordability and budgets possibly reducing," Joanne Robinson, director of lenders at Zuto Car Finance said.

"Alongside that, the average term a consumer is taking finance out for has increased by 3 months, which can be an indication of consumers trying to keep their monthly repayments as low as possible.

"Products such as refinancing have seen a huge rise in popularity this year as consumers look to reduce their existing outgoings by refinancing for a better rate."

Watch: Will UK house prices ever fall?