Editor’s note: Since publication, the Bank of England voted 7-2 to leave interest rates unchanged.
The market betting on whether it will do so today is split nearly exactly 50:50.
A few weeks back is seemed nailed on that rates would go from 0.1% to 0.25%.
Banks had already pulled their cheapest fixed rate mortgage deals from the market and replaced them with slightly more expensive ones in expectation of such a move.
Inflation was causing jitters and there were increasingly “hawkish” remarks from members of the Bank’s Monetary Policy Committee. (In the jargon, hawks are economists who fret most about inflation, doves think employment or lack thereof is the bigger issue.)
Simon French at Panmure Gordon says Ben Broadbent, one of the deputy governors, will be key. He has “remained rather quiet for several months,” says French, one of the City folk who think the Bank will leave rates unchanged.
French adds: “November’s decision looks highly likely to be a split vote with us marginally favouring a “hawkish hold” from the BoE - leaving open the possibility of a December or February interest rate increase. We certainly do not sit in the camp who see any rate increase as a policy mistake – rather our preference would be for more data to establish the underlying inflation dynamics in the UK economy. This has particular salience given the mixed messages being sent out by UK consumers at present.”
Capital Economics thinks there is “a high chance” that the Bank will move rates up today. “It may then raise rates to 0.5% in February, if not in December,” adds Capital.
So in general, it is no longer a case of IF rates will go up, but WHEN and how quickly.
One reason for the Bank of England to wait a bit is simply to collect more information about the direction of the economy. Is it going to keep pulling away from Covid woes, or sink back into them?
The reason to move fast is inflation – some worry that since it is already more than 3% the chance of it spiralling out of control is rising. That would leave the Bank playing catch-up, desperately trying to increase borrowing costs to rein in inflation that is racing away.
Capital says: “Much more important is that we don’t think those increases will be the first in a bigger series of hikes that take rates to the level of 1.25% currently priced into the market by the end of 2022. Instead, we think the Bank will pause when rates reach 0.50% and won’t take rates to 0.75% or above until sometime in 2023.”
What would a rise in rates mean for your family finances?
Analysis of Bank of England data by Mazars shows UK households are currently paying £17.5 billion annually in interest payments on floating rate debt that are likely to be immediately impacted by an interest rate rise. This includes floating-rate mortgages, credit card debt and other unsecured personal lending. Consumers will be hit by further rises as fixed rate debt is converted to floating rate.
At present the Bank of England’s base rate is 0.1%. If rates rose by just 0.25%, annual interest payments would increase to £18.4 billion almost overnight.
Further increases in the base rate would have a yet more dramatic impact. If interest rates were to rise by 0.5%, household interest payments would rise by a further £1bn to £19.3 bn. Interest payments would rise further still, to an eye-watering £21.2 billion – almost £4 billion above current levels – should there be a rate increase of 1%.
Paul Rouse at Mazars, says: “The UK household debt load is now so big, that even the most marginal increase in interest rates adds almost £1bn in extra costs almost overnight.”
Below we give the nine MPC members a hawk score. The higher the score out of ten, the more likely they are to vote for a rate rise: