The Bank of England
(Picture: PA Wire)The City expects the Bank of England’s nine-strong Monetary Policy Committee (MPC) to increase rates from 0.25% to 0.5% on Thursday, the first back-to-back interest rate rises since 2004.
It increased rates in December from 0.1% in a more controversial decision. The Bank said at the time it could no longer ignore inflation, something that until it had tried to present as a passing issue.
Inflation has continued unabated since then, leading to conviction in the City that the Bank will once again have to act.
How high could rates go?
Perhaps 1.5% by the spring, so a further three increases after tomorrow.
The Bank hopes that will bring inflation back closer to its 2% target.
Consumer Prices Index (CPI) inflation already hit a near 30-year high of 5.4% in December and painful energy price rises are expected to push it beyond 6% this spring.
Experts are predicting Ofgem’s energy price cap review also on Thursday will reveal a 49% rise, pushing the average household annual bill to around £1,900.
The question from sceptics is whether an increase in rates is actually going to do anything to lower the cost of goods or services or necessities like heating.
Laith Khalaf, head of investment analysis at AJ Bell, said: “The Bank of England can’t control the major factors that will push inflation up in the immediate future, such as global energy prices or elevated shipping costs.
“But a February rate hike would help persuade the market that the Bank really means business, and help to stave off embedded inflationary expectations that could spark a dreaded wage-price spiral.”
Isn’t the Bank worried that Covid will keep whacking the economy?
Martin Beck, chief economic adviser to the EY Item Club, said: “The Omicron variant has almost certainly left the economy weakened as a result of greater consumer hesitancy and a rise in the number of people isolating.
“But that the MPC raised Bank Rate in December regardless indicates that the committee placed less weight on the virus. And recent developments are likely to reinforce this stance.”
The hit to growth is likely to have been “more modest” than first feared, he added, while recent official figures confirmed the UK jobs market continues to fire on all cylinders with little impact from the end of furlough.
What else might the Bank do?
At some point it is going to have to start unwinding its £895 billion quantitative easing programme. That has seen it buy bonds from banks and pension funds in a bid to flood cash into the economy. It will probably soon start selling back those bonds.
The Bank has already said it would consider so-called quantitative tightening when rates hit 0.5%, which means the Bank could make the announcement alongside Thursday’s decision. Other central banks might follow suit.
What will happen to the housing market?
Most mortgage holders are on fixed rate products, meaning tomorrow’s changes will not have an immediate affect. However, they will find borrowing pricier when they roll off fixed deals and remortgage.
Cory Askew, head of sales at Chestertons, says: “We don’t expect the increase of 0.25% to have any major impact on current buyer behaviour; particularly as mortgage lenders would have already begun incorporating the base rate change into future calculations.
“The property market, particularly in London, continues to register record levels of house hunters, keen to find a new property to call home. Compared to January last year, our branches have witnessed an incredible 63% increase in buyer enquiries.”
