It comes after the US Federal Reserve hiked its central bank interest rate by a whopping 0.75 per cent yesterday – the fourth hike this year – taking rates to between 2.25 per cent and 2.5 per cent.
Both central banks are under huge pressure to rein in inflation, currently running at 9.4 per cent in the UK and 9.1 per cent in the States.
Federal Reserve chairman Jerome Powell said further rate hikes are likely, adding: “Nothing works in the economy without price stability. We need to see inflation coming down…That’s not something we can avoid doing.”
In the UK, most analysts expect the Bank of England will follow suit, taking the base rate from 1.25 per cent to 1.75 per cent initially, with another two hikes this year already priced in by markets. This would see the biggest increase in interest rates since 1995 and at 1.75 per cent, this would take it back to levels not seen since 2008.
According to calculations by AJ Bell, the rate increase would add £752m a year to the nation’s mortgage bills.
Laura Suter, head of personal finance at AJ Bell, said: “The move by the Bank will pile more misery on the 1.9 million people with variable rate mortgages as they battle the rising cost of living. Likewise, anyone in debt will see their costs rise.
“And while an interest rise is ostensibly good for savers, inflation is still taking your lunch and coming back for seconds.”
Economists at research house Capital Economics said the MPC would “step up its fight against high inflation” at next week’s meeting.
A statement from the firm read: “The MPC may imply that it is willing to raise rates by 50bps at future meetings if there are no signs that domestic price pressures are easing. That would support our view that interest rates will peak at three per cent rather than the analyst consensus of two per cent.”
Not all economists agree however. Pantheon Macroeconomics’ Samuel Tombs, said: “Investors remain convinced that the MPC will hike Bank Rate by 50bps at its next three meetings in August, September and November, and then by a further 25bps in December, leaving rates at three per cent by the end of this year.
“We continue to doubt, however, that the committee will accelerate its rate hiking cycle. The August meeting is a close call, but we expect the Committee to stick to a 25bps increase, and then to hike once more in September before stopping.”
Edge of recession
Earlier this week the International Monetary Fund warned central governments around the world that the global economy is “teetering on the edge” of recession, revising down its growth forecasts for the UK to just 0.5 per cent in 2023.
Though it acknowledged the pain tightening monetary policy would inflict on households, it was clear that delaying further interest rate rises would only feed inflation further, causing much worse pain later on.
The Bank of England is forecasting inflation to rise to more than 11 per cent in the autumn, however analysts at Pantheon said they are now expecting it to be closer to 12 per cent.
“We have revised up our forecast following a further surge in wholesale natural gas and electricity prices,” Tombs said.
“Those suggest that Ofgem will increase its price cap by about 65 per cent, rather than the 50 per cent we had expected.”
He added that Pantheon’s house view is that core inflation already has peaked.
“The MPC won’t be able to focus solely on fading momentum in month-to-month prints in the core consumer price inflation index if the high headline rate lifts wage growth and inflation expectations,” he said.
“But private sector pay settlements have plateaued at four per cent, and YouGov’s measure of medium-term inflation expectations has dropped back to four per cent in June, from a peak of 4.4 per cent in March.
“In addition, businesses expect wages to rise by 0.6 percentage points less over the next 12 months than over the past year, according to June’s Decision Maker Panel survey. Accordingly, the MPC probably will not conclude next week that it needs to act forcefully.”
Bank of England governor Andrew Bailey will announce the MPC’s decision at 12 noon on Thursday 4 August.
