Yahoo Finance Financial turmoil will force Bank of England to abandon rate rise, City predicts
The Bank of England will be forced to abandon an interest rate rise this week following turmoil in global financial markets, analysts have predicted.
Barclays has scrapped its expectation for a 0.25 percentage point rise in the Bank Rate on Thursday following UBS’s emergency takeover of Credit Suisse and the collapse of Silicon Valley Bank in the US last week. Now, it expects the Bank will hold rates at 4pc.
Silvia Ardagna, chief European economist at Barclays, said: “In light of elevated tensions in the US and European banking systems, we change our call and expect the Bank of England to pause next week and reassess the need for further hikes at the May meeting.”
Successive Bank Rate rises have pushed mortgage costs to levels not seen since the financial crisis. However, mortgage brokers said swap rates, which are used to price fixed-rate mortgages, were still trending lower.
David Hollingworth, of L&C Mortgages, said the base rate being held would “open up the chance” for banks to start reducing fixed rates.
He added: “If we see easing in swap rates maintained we should see rates come back below 4pc or perhaps undercut where we are at now.”
A borrower taking out a two-year fixed rate £200,000 mortgage at the current Bank Rate of 4pc would pay £1055.67 a month. If the rate were to rise to 4.25pc as previously predicted, this would add £27.81 to their monthly payments – or £667.44 over the two-year fix.
Ms Ardagna said that the crisis in US regional banks and pressure on Credit Suisse overshadowed the Chancellor’s Budget last week and the Office for Budget Responsibility's assessment of the public finances.
The change in Barclays’ forecasts mirrors a sea change in the consensus among investors after the banking fallout began.
On March 9, the day before Silicon Valley Bank collapsed, investors had priced in a Bank Rate rise to 4.25pc at the Monetary Policy Committee’s next meeting. Now, the consensus is that rates will stay flat.
Investors have also changed their longer-term predictions. Just 11 days ago, they had forecast a peak in the Bank Rate of 4.8pc in December. Now, the consensus is a smaller peak of 4.7pc in November.
Investec has downgraded its expectations for Thursday’s decision from 4.25pc to 4pc, citing increased concerns over financial stability.
Barclays’ expectation that rates will remain flat comes despite the fact that it thinks February inflation will be even higher than the Bank of England’s forecast, which should mean greater pressure for rate increases.
Barclays has forecast that the consumer prices index will have jumped by 10.1pc in February – unchanged since January and higher than the Bank’s expectation of 9.9pc.
Thomas Pugh, of RSM, an accounting firm, also said he had downgraded his expectations to 4pc, as a result of turbulence in financial markets.
Sanjay Raja, chief UK economist at Deutsche Bank, added: “There are a lot of ‘unknown unknowns’ which makes this decision even more unpredictable.”
Deutsche Bank has maintained its forecast for a 0.25 percentage point increase but Mr Raja said the situation is live.
He added: “The key thing for us will be watching bank-based financial conditions and how that impacts credit availability. We won’t have a clear answer to this before Thursday’s decision. The Bank may have clearer insight, however.”
The Bank's agents are likely to be canvassing the views of lenders on how their risk and lending appetites have changed after Credit Suisse's takeover, Mr Raja added.
