UK Markets closed

Interest rate rise might be lower than market expects, says Bank of England official

Bank of England deputy governor Bent Broadbent
Interest rates: Deputy governor Bent Broadbent said the Bank of England will respond promptly to news about fiscal policy. Photo: Victoria Jones/PA vía AP

Bank of England deputy governor Ben Broadbent has said it “remains to be seen” whether UK interest rates have to rise as much as the markets predict.

Speaking at Imperial College London on Thursday, Broadbent said the central bank is ready to respond to changes in the government’s new fiscal strategy that is being led by chancellor Jeremy Hunt after the death of Trussonomics.

“The MPC is likely to respond relatively promptly to news about fiscal policy. Whether official interest rates have to rise by quite as much as currently priced in financial markets remains to be seen,” the deputy governor said.

Read more: Interest rate rises: what you need to know

He added that if government support mitigates the effect of inflation on households – as it is doing with its cap on energy prices – the Bank could do more.

“Equally, if government support mitigates that effect, there is more at the margin for monetary policy to do.

Broadbent said that while the “justification for tighter policy is clear” in the face of soaring inflation, demand will slow to some extent anyway due to higher prices.

UK bond future prices rose and investors further reined in their expectations of a full percentage-point interest rate increase by the BoE next month following the speech.

Read more: Jeremy Hunt bins disastrous mini-budget

They now indicate there’s an 85% chance that the Bank raises rates to 3% on 3rd November, from 2.25% today, which would be a three quarter-point rise.

A full percentage point rise, to 3.25%, is only a 15% chance, Reuters reported.

Interest rates are expected to climb sharply as the BoE attempts to control inflation (Yahoo News UK/Flourish)
Interest rates are expected to climb sharply as the BoE attempts to control inflation (Yahoo News UK/Flourish)

A whole percentage-point rate hike was seen as a near certainty before Truss was forced to backtrack on her unfunded tax cut plans.

Read more: Bank of England wasn’t fully briefed before Liz Truss’s disastrous mini-budget, Cunliffe reveals

Interest rates were forecast to more than double to over 5% by next summer, But even a three-quarter point increase would be the largest rise in UK Bank Rate in 33 years, putting more pressure on borrowers, and meaning remortgaging will be expensive.

Broadbent’s remarks indicate caution at the BoE about how quickly to tighten monetary policy as the risk grows that the UK has already slipped into recession.

Watch: How does inflation affect interest rates?