Yahoo Finance Bank of England likely to raise interest rates to 5% after inflation shock
Bank of England rates heading towards 6%
More mortgage misery is likely to hit homeowners as the Bank of England (BoE) looks set to raise interest rates to a 15-year high of 4.75% or even 5% this Thursday.
Markets are expecting UK interest rates to rise by another 0.25 to 0.50 percentage points and say there could be more hikes on the horizon following the shock rise in core inflation.
The consumer prices index remained flat at 8.7% in May, higher than economists expectations of a drop to 8.4%.
Concerningly, there was a rise in “core inflation”, which excludes food and energy prices in order to create a less volatile picture of domestic price rises. This rate, closely watched by the Bank of England, rose to 7.1%, after April’s figure was already a 30-year high.
This is the huge problem for the Bank of England (and the rest of us)... 👇
Core #inflation (excl. food and energy) is no longer just 'sticky' - it's actually heading in the wrong direction pic.twitter.com/dGDsf3gRO0— Julian Jessop (@julianHjessop) June 21, 2023
Traders have fully priced-in that policymakers will be forced to increase the Base Rate to the highest level since February 2000 by December.
The only question is whether the Bank of England plumps for a quarter-point rise in rates, to 4.75%, or goes big with a half-point rise to 5%. Traders think there is a 50% chance that the Bank of England will raise rates by 0.5 percentage points this Thursday.
Capital Economics are now predicting that the Bank will go for the half-point rise, to 5%, due to this morning’s inflation report.
Read more: Inflation stuck at 8.7% as cost of living squeeze continues
"While tomorrow’s MPC meeting is finely balanced, we think that a 50bps increase in Bank rate is now slightly more likely than a 25bps. The consensus remains for a smaller increase, but the markets are pricing in a 50% chance of larger move. Accordingly, a failure to deliver could cause financial conditions to loosen and the pound to weaken, which is the last thing that policymakers at the Bank need right now."
While the current rate of 4.5% was previously seen as being at or close to a high watermark, most analysts now think 6% will be the peak by the end of the year.
“The market is now firmly pricing in an interest rate rise at the MPC’s June meeting, and then four further hikes, taking us to 5.75%," said Laith Khalaf, head of investment analysis at AJ Bell.
"A few hawkish comments from the Bank of England, or some more ugly inflation data, could easily tip those expectations up to 6%.”
🚨🇬🇧After higher-than-expected CPI data was released, OIS futures priced in the Bank of England raising interest rates to 6% in early next year. #BOE #MM pic.twitter.com/jogdkM6CCD
— MacroMicro (@MacroMicroMe) June 21, 2023
Matthew Ryan, head of market strategy at Ebury, said: “The BoE has been backed into a corner, and will have no choice but to continue raising interest rates aggressively in the coming meetings. We now think that one, or perhaps even both, of members Dhingra and Tenreyro will vote for an immediate hike on Thursday, having opted for no change at the past few MPC meetings.
Read more: House prices cool down as rising mortgage rates keep buyers away
"We could also see a handful of votes in support of an even larger rate increase, and a 50bp hike is now a very realistic possibility. Indeed, swap markets are currently assigning almost a 50/50 chance of a half a percentage point move in rates this week."
BoE governor Andrew Bailey told a parliament committee on inflation was taking "a lot longer than expected" to come down and the labour market was "very tight" – prompting the higher forecasts.
Beforethe inflation figures came out, Sanjay Raja, chief UK economist at Deutsche Bank, said: “We expect the BoE to hike bank rate for a 13th consecutive meeting (25bps) to 4.75%.
“Divisions within the MPC will likely remain. We see a 7-2 vote tally, with both Tenreyro and Dhingra voting to keep rates on hold,” he added.
The Bank of England is “caught between a rock and a hard place, as it has to choose between pushing more mortgage borrowers towards the brink and letting inflation run riot”, Khalaf added.
Taking the interest rate to 4.75% or 5% would drive the cost of borrowing and hit more than a million mortgage holders whose fixed-rate deals are due to expire soon. A quarter point increase in the interest rate means their monthly bills would surge by hundreds of pounds.
The prospect of further increases from the Bank of England has prompted to pull deals and hike rates at short notice.
Read more: Interest rates set to rise as pay growth jumps
HSBC UK briefly took some mortgage products available through brokers off the market last week as it faced high demand from homeowners. It is set to raise mortgage rates for the second time this week.
Santander also temporarily paused some mortgage applications earlier in the week in light of “changing market conditions”.
“The estimated 1.6 million homeowners on variable and tracker rates should brace themselves for yet another climb in mortgage costs in step with the movement of the Bank of England's base rate,” Myron Jobson, senior personal finance analyst at Interactive Investor, said.
Read more: Interest rates: Bank of England policy-maker hints at further rises
The average mortgage holder is looking at a £200 increase in their monthly repayments if their rate goes up by three percentage points.
More than 2.5 million UK homeowners who will have to renegotiate their mortgage over the next two years face paying £9bn more as interest rates jump, Cebr said.
“The latest ugly inflation data could spell more mortgage misery for those at or nearing the end of their fixed rate deals following a stress inducing couple of weeks which has seen lenders reprice their home loans on market expectations that interest rates will peak at a higher level, and stay higher for longer," Myron Jobson, senior personal finance analyst at Interactive Investor, warned.
"This cohort continue to wrestle with a double whammy of rising borrowing costs and stubbornly high inflation which threatens to lay waste to finely tuned budgets," he added.
Economists have pointed out that important indicators of persistent inflation, namely price increases in the service sector and wage growth, have remained elevated, which is likely to worry monetary policy committee (MPC) policymakers.
“The scale of the market reaction indicates a lack of confidence that the Bank has done enough so far to bring inflation under control,” Andrew Goodwin, chief UK economist for Oxford Economics said.
“It also implies that the MPC will be willing to act further.”
Danni Hewson, AJ Bell head of financial analysis, said: “They’ve battled through high energy costs, switched supermarkets and traded down for some of those nice to haves, but the huge numbers some homeowners are facing when they come to re-mortgaging will undoubtedly put pressure on employers to hike wages further in the coming months.
“There will be more pressure on the government to step in and help struggling homeowners, especially as an election creeps ever closer."
The Bank of England has said it will continue to raise interest rates so long as it sees signs of inflationary pressure.
Jonathan Haskel, an external member of the MPC, said the further increases could not be ruled out because prices are still rising faster than the 2% target.
"My own view is that it's important we continue to lean against the risks of inflation momentum, and therefore that further increases in interest rates cannot be ruled out," Haskel wrote in an article for The Scotsman newspaper.
"As difficult as our current circumstances are, embedded inflation would be worse," he added.
Read more: UK mortgage approvals slump after interest rate hikes
These "circumstances" have pushed more companies to collapse across England and Wales in May as small businesses can't keep up with increasing interest rates.
There were 2,552 registered company insolvencies in May, statistics from the Insolvency Service show, up from 1,825 in May 2022. It’s also an increase on April, when 1,688 insolvences in England and Wales were reported.
“Rising interest rates have been a blow to struggling businesses, with the potential for more pain when the Bank of England meets next week to decide the base rate," David Kelly, head of insolvency at PwC, said.
"For small businesses in particular, these higher rates make it increasingly difficult to take on and finance debt, with many having to use their emergency cash reserves to do so, thus intensifying liquidity issues.
"As such, we’re seeing an uptick in the number of firms needing debt restructuring services and looking at ways to compromise their existing on and off balance sheet liabilities."
The BoE’s own quarterly survey of public attitudes to inflation has found that net satisfaction with the central bank hit its lowest level since records began in 1999.
The Bank of England will announce its decision on interest rates this Thursday, 22nd at around 12h00.
Watch: How does inflation affect interest rates?
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