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Bank of England interest rate: ‘Anything other than a hike would be a huge surprise’

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  • 31/07/2018
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Bank of England interest rate: ‘Anything other than a hike would be a huge surprise’
Businesses and households have been urged to gear up for the second interest rate rise in less than a year this week, as the Bank of England’s Monetary Policy Committee (MPC) is expected to raise the base rate to 0.75%.

 

 

Markets are pricing in around a 90% chance of an increase in rates when policymakers reveal their August rate decision at midday on Thursday.

Weak economic data threw an expected rate rise off course earlier this year.

But some improvement in performance, albeit alongside falling inflation, is thought to have been enough to persuade the majority of the nine-member MPC to vote for a rise.

Most experts agree the bank is more likely to hike than hold.

Mike Riddell, senior portfolio manager UK Fixed income at Allianz Global Investors, said: “Anything other than a rate hike by the Bank of England would be a huge surprise.

“Three members voted for a hike last month, up from the usual two, and neither the governor nor the deputy governor have tried to dissuade the market that a hike is coming in recent speeches.”

 

Worries for the housing market

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The committee likely won’t vote unanimously to hike rates—we look for a 7-2 split—but most members still believe that inflation will exceed the 2% target in the medium term if they don’t start to withdraw some monetary stimulus now.

“The committee likely will argue that the effects of raising interest rates will be modest, because two thirds of households now have fixed-rate mortgages.

“Interest payments therefore won’t surge, though we fear for the impact that the rate rise will have on the flagging housing market.”

In the aftermath of the last interest rate rise in November, many lenders almost immediately passed the 0.25pp increase on to variable rate customers, with an increase in tracker rates and Standard Variable Rates (SVR).

Lenders are likely to follow the same path again.

Fixed rate mortgage costs are set to rise more gradually, with some lenders likely having taken the opportunity to price in a rise ahead of the event.

Two-year fixed-rate mortgages hit a two-year high earlier in July, according to Moneyfacts.

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