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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

UK in ‘prolonged recession’ as Bank of England hikes interest rates to 3%, knocking pound – as it happened

Inflation Rachel Reeves United States Jerome Powell United Kingdom Bank of England Economy Interest Rates

Closing summary

Time to recap, after a busy day in which the UK central bank unleashed its most forceful act to tame inflation for 30 years.

Homeowners are facing the biggest single shock on their mortgage bills since the 1980s as the Bank of England hiked interest rates for the eighth time in a row.

But the UK’s central bank has also tried to calm fears that interest rates could hit 5%, warning that this would trigger a very painful two-year recession.

Governor of the Bank of England, Andrew Bailey, during a press conference today
Governor of the Bank of England, Andrew Bailey, during a press conference today Photograph: Andy Rain/EPA

The Bank’s base rate has been lifted to 3% from 2.25%, its highest for 14 years, which will add around £3,000 per year on to mortgage bills for those households that are set to renew their mortgages, on average.

More than two million people on variable rate mortgages will suffer an immediate hit, while approximately 1.8 million households whose mortgages are up for renewal next year face a jump in their repayments too.

Bank governor Andrew Bailey defended hitting households with higher borrowing costs. He warned that inflation was too high, and would cause more pain if it wasn’t brought down.

He told reporters:

“If we do not act forcefully now it will be worse later on.”

And the Bank also pushed back against recent market expectations that interest rates could hit 5.25% next year.

Bailey explained:

“We can’t make promises about future interest rates but based on where we stand today, we think Bank Rate will have to go up by less than currently priced in financial markets.”

Its latest economic forecasts showed that hiking that high would push the UK into the longest downturn in modern history – a two-year contraction.

But if rates stayed at 3% the recession would last five quarters – which will still be a heavy blow to many households and firms.

In both scenarios, UK inflation falls back from its current double-digit levels and undershoots its target towards the end of the forecast period – a sign that the Bank doesn’t anticipate hiking rates as high as 5%.

Two of the Bank’s nine rate-setting policymakers, Silvana Tenreyro and Swati Dhingra voted against the hike, favouring smaller increases in borrowing costs, given the UK’s economic plight.

Tenreyro, who only wanted a 25-basis point rise, pointed out that monetary policy had already been restrictive in light of falling real incomes, with the economy now likely to be entering recession.

In a gloomy warning, governor Bailey said the turmoil hitting the UK is worse in economic terms than what hit in the 1970s, due to the Ukraine war and supply chain disruption following the pandemic.

“This is a huge shock.”

“If you compare this to the 1970s, and you compare this year to single years in the 1970s, and also government policies comes into play there in terms of energy markets. This is a bigger shock than in any year in the 1970s.”

And Bailey signalled that mortgage rates should come down, as the markets adjusted:

We can make no promises about future interest rates.

But based on where we stand today, we think [rates] will have to go up by less than currently priced into financial markets. That is important because, for instance, it means that the rates on new fixed-term mortgages should not need to rise as they have done.”

The Bank also showed how political upheaval had pushed up UK borrowing costs:

The pound fell sharply as traders digested Bailey’s words. Sterling has shed over two cents against the dollar to $1.118, with one investment manager warning the pound is trapped in a ‘currency doom loop’.

Chancellor Jeremy Hunt admitted that the rise would be very tough for families with mortgages and businesses with loans, and warned of ‘difficult decisions’ ahead:

“The most important thing the British Government can do right now is to restore stability, sort out our public finances, and get debt falling so that interest rate rises are kept as low as possible.

“However, there are no easy options and we will need to take difficult decisions on tax and spending to get there.”

His Labour counterpart, Rachel Reeves, said PM Rishi Sunak should face up to the mistakes that have left the UK in a “vicious cycle of stagnation”.

“Families now face higher mortgages and more anxiety after months of economic chaos.

“Today’s recession warning lays bare how 12 years of Tory government has weakened the foundations of our economy, and left us exposed to shocks, lurching from crisis to crisis with falling living standards and low growth.

The Resolution Foundation said over five million households are set to see their monthly mortgage bills increase sharply over the next two years, by an average of around £3,900.

Citizens Advice urging banks to show understanding to anyone struggling with loan repayments, and to reach out in case customers need help, but are too worried to ask.

Morgan Wild, head of policy at Citizens Advice, says:

“Right now, people are facing a double whammy of soaring interest rates and sky-high inflation.

Economists warned that lifting interest rates so sharply, in an effort to lower inflation, are worsening the near-term economic outlook.

Melanie Baker, senior economist at Royal London Asset Management, explained:

“Despite another set of grim forecasts for the real economy, including for the unemployment rate, they hiked 75bp today. It is clear that their focus remains inflation.

Here’s our latest news story on the Bank’s decision:

Analysis from our economics editor Larry Elliott:

And an explanation about how higher rates will affect you:

Updated

Dr Alla Koblyakova, an expert in mortgage finance at Nottingham Trent University, flags that higher interest rises will hit millions of mortgage holders hard:

“Around 80 per cent of UK mortgage borrowers are on variable, tracker or short-term fixed rate mortgages of only three years. This equates to more than eight million households in the UK. Many of those fixed-term mortgages will be ending soon. That is a huge amount of people who will soon be exposed to much higher interest rates, and the impact on house prices is going to be extremely negative in the short run.

“For a £150,000 mortgage, based on today’s announcement, the average household will need to spend about £250 more per month on their monthly mortgage payments.

“The impact will be asymmetric and more profound in London, the south east and south west, due to those areas having the highest property prices and mortgages in the country.

Dr Koblyakova adds that the government should consider intervening to cap the amount of profit that lenders can make on top of the base rate to help protect borrowers.

Updated

Here’s a video clip of Andrew Bailey’s press conference:

Updated

Pound trapped in 'doom loop'

The pound is on track for its worst day against the US dollar since the day of the mini-budget.

Sterling is still down over 2 cents against the greenback tonight, after the Bank of England warned the UK faces a protracted recession, and hinted rates will peak lower than expected.

The pound vs the US dollar
The pound vs the US dollar Photograph: Refinitiv

Charles Hepworth, investment director at GAM Investments, says there is a big contrast between the BoE and the Federal Reserve – which warned last night that markets were underpricing future US interest rate hikes.

This is entirely down to the fact that the UK economy is in a much weaker position than the US and the Bank believes we are already in a recession which will see GDP fall for a record-breaking eight quarters into the middle of 2024.

“With a less aggressive central bank, the release valve in sterling is where the market action is and it is trading a lot lower against the dollar (down close to 2% on the day).

The Bank is stuck in a hole: currency weakness pushes up imported inflation, but hiking aggressively into the teeth of a recession is never normal policy, yet they are. It’s difficult to see how this currency doom loop can be escaped.”

The Bank’s monetary policy report has also shown the damage caused by the mini-budget

This chart shows how ‘UK factors’ pushed up the cost of government borrowing (measured by the yield on British gilts).

The rise in UK borrowing costs this year
The rise in UK borrowing costs this year Photograph: Bank of England

The Bank says that part of the repricing in these rates since August reflects global developments, but there had clearly been an important UK-specific component too.

One model estimated by Bank staff that decomposes movements in 10-year gilt yields suggests that UK factors have played an increasingly significant role in driving yields since August

According to market contacts, these UK factors included a higher central expectation for Bank Rate, heightened political and economic uncertainty associated with the Government’s fiscal announcements, and market illiquidity.

Money market expectations for UK interest rates next year have actually risen a little today, from 4.6% to 4.7%:

Capital Economics aren’t convinced that market expectations for UK interest rate rises are too high.

Their UK economist Ruth Gregory thinks rates will hit 5% next year, despite the Bank of England’s dovish noises today.

She explains:

Although the Monetary Policy Committee raised interest rates today by 75 basis points, from 2.25% to a 14-year high of 3.00%, it sent the strongest signal yet that it thinks rates won’t need to rise much above 4.00%.

But with price/wage expectations still elevated, we think the inflation battle is far from won and that rates will peak at 5.00% rather than the 4.25% expected by most economists.

Updated

Downing Street: “difficult choices” ahead

Downing Street said there will be “difficult choices” to come on tax and spending after the Bank of England hiked interest rates for the eighth time in a row today.

Responding to the Bank of England’s move, a No 10 spokeswoman said:

“The Prime Minister recognises that this will be a worrying and difficult time for people, families and businesses across the UK.

“The number one priority for his Government is bringing down inflation. There will be some difficult choices, but we will ensure that we are actually fairly, protecting the most vulnerable and continuing to seek long term growth.”

Pressed on whether Rishi Sunak agrees with the Bank that there is going to be a long recession, she said:

“We recognise that people will be concerned by those forecasts.

Again, that’s why, as the Chancellor said, the best thing the Government can do if we want to bring down rises in interest rates is to show that we’re bringing down our debt.

He was clear there are no easy options, we (will) need to take difficult decisions on tax and spending to get there, but economic stability is the priority for this Government.”

Our Politics Live blog has all the latest from Westminster:

Bloomberg are reporting that Chancellor of the Exchequer Jeremy Hunt has likened his job to the “interesting shit” that faced Barack Obama during the 2008 financial crisis.

They say:

Hunt told a gathering of senior business people on Tuesday that the UK is in a “very challenging situation.”

Describing the economy he inherited, Hunt repeated a quip Obama made 14 years ago, saying: “This would be really interesting shit if I wasn’t in the middle of it,” according to a person present.

The chancellor drew laughs after citing Obama’s famous comment from his presidential campaign during the finanancial crisis, Bloomberg adds, but “some attendees took a dim view”.

One obvious difference is that Obama picked up a crisis created on Republican George W Bush’s watch, while Hunt is clearing up his own party’s mess.

Here’s the full story: Chancellor Jokes About Britain’s Dismal Economic Situation

Update: A reader kindly reminds me that Hunt has used this analogy before:

Updated

Governor Andrew Bailey has recorded a video clip, explaining that the Bank raised interest rates by three-quarters of a percentage point because inflation is too high.

He says he knows that high interest rates will have a real impact on people, at a time when many people are struggling with high energy and food costs, and other bills.

But ‘low and stable inflation’ is vital for a healthy economy, he adds, letting people plan with confidence.

And he adds that inflation is expected to fall quite sharply from the middle of next year:

ING: Rate rises will stop at 4% next year

Governor of the Bank of England, Andrew Bailey, addressing the media on the Monetary Policy Report today.
Governor of the Bank of England, Andrew Bailey, addressing the media on the Monetary Policy Report today. Photograph: Toby Melville/AFP/Getty Images

ING reckons UK interest rates won’t rise above 4% next year, given Andrew Bailey’s pointed hints that the market expectations are too high.

Their developed markets economist James Smith writes:

Andrew Bailey was very forthright in his press conference that rates are unlikely to rise as far as markets expect (currently just shy of 5%). What’s more, the committee is very divided. One policymaker, Silvana Tenreyro, voted for just 25bp worth of tightening today.

“The Bank may have stepped up the pace this month, but central banks globally are having to assess whether ongoing aggressive rate hikes can be justified at a time when housing and corporate borrowing markets are beginning to creak.

“The choice the Bank faces at coming meetings is one of hiking aggressively to protect sterling, or moving more cautiously to allow mortgage rates to gradually fall. With around a third of UK mortgages fixed for just two years, we suspect the latter option will increasingly be seen as more palatable.

The dovish messages littered throughout today’s statement and forecasts are a clear sign of that. We’re pencilling in a 50bp rate hike in December and we think the Bank rate is unlikely to rise above 4% next year.”

How we covered 1989's rate hike

Today’s Bank of England vote to increase the cost of borrowing by 0.75 percentage points to 3%, is the biggest increase in rates since 1989 – when the Treasury set interest rates.

My colleague Jason Rodrigues has delved into the archives, and reports:

Back in October 1989, Conservative chancellor Nigel Lawson’s decision to raise interest rates by one per cent was designed to “keep the lid on inflationary pressure,'’ he said.

Lawson also commented:

“It is cloud cuckoo land to suggest there is an alternative.”

Lawson’s blunt remarks were quoted in the Guardian’s coverage the day after he had increased rates. His decision to raise rates - it was only in 1997 that the Bank was granted independence to set rates itself - was not popular, not least with the right wing of his party.

They saw his intervention as contradicting party leader Margaret Thatcher’s beliefs that you “couldn’t buck the markets'’

Though nervous, the markets did initially react favourably, as we reported on the same front page.

And here it is:

The Guardian story about 1989's interest rate rise
The Guardian story about 1989's interest rate rise Photograph: The Guardian

PS: John Major’s government was forced into a 2% rate rise during the exchange rate mechanism crisis in 1992, though for less than 24 hours before it was scrapped.

How UK interest rate hike will affect you

Today’s interest rate hike will hit many of the roughly 2.2 million people on a variable rate mortgage hard, at a time when other costs are rising, my colleague Rupert Jones points out.

Many now face paying hundreds of pounds extra a year – and for some with bigger loans it will be thousands.

About half of that 2.2 million are either on a tracker or discounted-rate deal. The other half are paying their lender’s standard variable rate (SVR).

A tracker directly follows the base rate, so your payments will almost certainly soon reflect the full rise. On a tracker previously at 3.5%, the interest rate would rise to 4.25%, adding £59 a month to a £150,000 repayment mortgage with 20 years remaining. If that were an interest-only mortgage, it would be an extra £93 a month.

SVRs change at the lender’s discretion, but most will go up, though not necessarily by the full 0.75 points. Some lenders may take some time to announce what they are doing.

However, about 6.3m UK mortgages (three-quarters of the total) are fixed-rate home loans. These borrowers are insulated until their deals expire, but for many that will be in the next few weeks or months.

Taking out a new mortgage is also much more expensive than at the start of of the year, although some rates have been falling from their mini-budget peak.

The cost of credit cards has also been rising.

But it’s better news for savers: there are a number of accounts out there paying 5% or so, and this will increase after this latest interest rate decision.

More here:

Here’s a clip of Rachel Reeves, shadow chancellor, warning that the Bank’s economic forecasts are ‘incredibly concerning’.

And here’s chancellor Jeremy Hunt’s response (we also heard from him earlier).

Hiking interest rates, when the economy is probably already in recession, will make the downturn worse.

Melanie Baker, senior economist at Royal London Asset Management, says the Bank is focused on fighting inflation now, while also trying to guide market expectations for rate rises down.

“Despite another set of grim forecasts for the real economy, including for the unemployment rate, they hiked 75bp today. It is clear that their focus remains inflation.

They see risks to their inflation forecasts as skewed to the upside and this appears to be an important element of their thinking.

“Interest rate hikes, in an effort to lower inflation, are worsening the near-term economic outlook. The decision, forecast and minutes today are consistent with downside risk to my forecast peak for UK interest rates at 4.5%.

However, with domestically driven inflation pressures still looking relatively strong and fiscal policy uncertain, the skew of risk to my forecasts may change again before the end of the month.”

Updated

Household finances are facing a ‘perfect storm’ of both the damage done by high inflation, and now higher mortgage payments and rents, as landlords pass rate rises on.

That’s the warning from theMoney Advice Trust, the charity that runs the National Debtline and Business Debtline which offers advice to people in difficulties.

Jane Tully, director of external affairs and partnerships at Money Advice Trust, says the government must help people struggling with mortgages:

“For millions of mortgage payers, the impact of recent rate rises are yet to be felt – meaning the worst is yet to come. Action is needed now to help people who are struggling.

“The government must urgently reform the Support for Mortgage Interest scheme to bring down the 39 week wait for support to 13 weeks, and extend eligibility to ensure support reaches people who need it.

“Early intervention is also crucial, and lenders need to be proactive in offering support to customers worried about their repayments.

Larry Elliott: Bank of England signals interest rates probably won’t go much higher

The reason the Bank of England massaged down interest rate expectations today is obvious: it sees the risk of pushing rates too high, our economics editor Larry Elliott writes:

Already, some members of the MPC are getting nervous about squeezing a fragile economy too hard. Only seven of the nine voted for a 0.75-point increase, with Swati Dhingra opting for a half-point rise and Silvana Tenreyro going for a quarter-point hike.

The MPC has now raised interest rates at its last eight meetings, during which time the official cost of borrowing has risen from 0.1% to a level last seen in late 2008. Tenreyro said the economy was already in recession and that most of the tightening of policy over the past year had yet to feed through to the real economy.

The majority of the MPC remained concerned about the tightness of the labour market, although its own forecasts suggest it won’t stay tight for much longer. It has not factored into its forecasts the higher taxes and cuts to public spending due to be announced by Jeremy Hunt on 17 November, even though the chancellor’s autumn statement will slow the economy still further.

Financial markets will view the MPC as markedly more dove-ish than they were anticipating. The Bank is suggesting a further tweak to interest rates will be needed but that anything more would be overkill.

Professor David Blanchflower, a former Bank of England policymaker, argues the Bank should have cut rates, not raised them.

He points out that October’s purchasing managers survey showed that the economy is falling into recession (the UK private sector shrank again in October for the third month running).

Updated

The financial markets are currently predicting the Bank will raise interest rates by another half-point in December, to 3.5%.

Rates are then seen rising to 4% in February 2023, and to around 4.7% at the end of next year.

The CEBR thinktank, though, expects a bigger rise of 75 basis point rise in December, closing the year with base policy rate of 3.75%, followed by another 50 basis point rise in early 2023.

UK interest rate rises and inflation

CEBR economist Benjamin Trevis explains:

Cebr expects inflation to remain in double digits until February, which will erode household spending power and add to concerns of a wage-price spiral occurring from the BoE.

The MPC faces a tough balancing act, however, with signs from retail sales and consumer borrowing that activity by UK consumers is slowing.

Future rate rises will depend on upcoming inflation readings, as well as the content of the Autumn Statement on 17 November.”

This is the key message from the Bank today – rates are not expected to rise as high as the 5% which markets had been expecting last month

Updated

Raj Badiani, principal economist at S&P Global Market Intelligence, predicts that the Bank of England will hike interest rates again in December, and also in early 2023, as it kees fighting inflation.

But hs also suspects the tightening cycle should end earlier and at a lower peak than 4.5% next autumn.

That would “allow the economy some breathing space after several quarters of contraction alongside reducing the risk of a major housing market correction” Badiani adds.

Barbara Rismondo, senior vice president at Moody’s Investor Service, warns that first-time buyers are now facing severe stress:

“Housing affordability is under severe stress in the UK, particularly for first-time buyers as the end of the help-to buy programme coincides with the highest hike in the Bank of England base rate since 1989.”

Citizens Advice are urging banks to show understanding to anyone struggling with loan repayments, and to reach out in case customers need help, but are too worried to ask.

Morgan Wild, head of policy at Citizens Advice, says:

“Right now, people are facing a double whammy of soaring interest rates and sky-high inflation.

“Those on expiring fixed-rate mortgages could face hikes of hundreds of pounds to their monthly payments. And people on variable rates will already be seeing their costs go up.

“This comes on top of other pressures like energy bills going through the roof and the food shop not stretching as far.

Today’s interest rate rise is both expected and historic, in terms of its sheer scale, says James Smith, research director at the Resolution Foundation:

Despite the Bank clearly signalling that rates will not go as high as financial markets have been expecting, further rate rises are still coming, with over five million households set to see their monthly mortgage bills increase sharply over the next two years, by an average of around £3,900.

“The Bank also made clear that the cost-of-living crisis is set to get far deeper, and not just for those with a mortgage. Everyone will be affected by prolonged double-digit inflation, but poorer households will be hit hardest by the surge in food prices and energy bills.

“This provides a sobering backdrop for the Autumn Statement, where the Government will need to both calm the markets, while also protecting households from the worst of the cost-of-living storm.”

Updated

Hunt: Very tough news for families and businesses

Chancellor Jeremy Hunt says today’s news is going to be very tough for families with mortgages up and down the country, and for businesses with loans.

But there is a global economic crisis, he adds, with the IMF saying a third of the world’s economy is now in recession.

The best thing the government can do if we want to bring down these rises in interest rates is show we are bringing down our debts, Hunt continues.

That’s a sign that he’s planning steep spending cuts and tax rises in the fiscal statement later this year.

Hunt also suggests that governments need to balance their accounts, like families around the country (this comparison isn’t really right: the government will be borrowing north of £100bn this year to balance the books).

Q: But the evidence is very clear that there is a very big UK component, and your party bears responsibility for it.

Hunt says the government is taking difficult decisions, such as reversing the mini-budget.

The biggest single thing we can do is help the Bank of England bring down inflation, by producing national accounts that balance, to show that “in the end we have sound money in this country” and bringing down debt, Hunt concludes.

Updated

NIESR, the economic think tank, has warned that millions of households would face misery if UK interest rates were to rise as high as 5%.

NIESR says:

  • Variable rate mortgage repayments are set to double if the bank rate hits 5 per cent; potentially affecting the two a half million of UK households on a variable rate mortgage

  • On average, the monthly repayment on a typical variable rate will rise from around £500 to over £1,000

  • Around 30 thousand households could see monthly mortgage repayments greater than their monthly incomes

Max Mosley, NIESR economist, explains:

“We now have evidence of what is potentially on the horizon for millions of households. Those most vulnerable to mortgage rate rises could see their real incomes decimated if interest rates surpass 5 per cent.

This shock to mortgage repayments, in combination with a decade of stagnant real incomes, the impact of Covid-19, inflation and a cost-of-living crisis, presents an unprecedented assault on the country’s living standards.”

Back in the Bank’s press conference, Andrew Bailey has been asked if hopes of a ‘soft landing’ for the UK economy are dead.

Governor Andrew Bailey says we should bear in mind the size of the shock to real incomes, particularly from Russia’s invasion of Ukraine, to understand the UK recession.

“This is a huge shock”, Bailey says, worse than the shock in the 1970s.

Deputy governor Ben Broadbent points out that the Bank also forecast a recession back in August, and hasn’t been promising a soft landing (this is a bigger issue in the US).

The rising cost of goods, food and energy will depress the economy, he points out, and mean the Bank must act to bring inflation down.

Sterling sinks after BoE warning

The pound has fallen sharply against the US dollar and the euro.

It was hit by a wave of selling after the Bank of England warned that market expectations for future rate rises are too high.

Sterling has shed over two cents, to a near two-week low of $1.117, with the Bank’s warning of a two-year recession also hitting the pound.

Against the euro, the pound has shed almost one and a half eurocents to €1.146.

Michael Hewson of CMC Markets explains:

The pound had been trading in the middle of the pack against the US dollar, until the Bank of England announced it was raising rates by 75bps, although there was some dissent on the size of the move, and then spent the next hour undermining that hawkish move in what can only be described as “Operation Protect the Housing Market”.

The key message was that rates were unlikely to go anywhere near as high as markets were pricing, although they were still expected to rise, and that the UK economy was likely to face a 2-year recession.

Updated

Here are the key charts from the Bank of England, outlining how the UK has fallen into a two-year recession based on market-implied interest rate moves.

The Bank of England’s forecast
Bank of England growth forecasts

Updated

Q: The Bank is predicting a two-year recession, two members of your committee didn’t support today’s rate hike, and your own forecasts show that interest rates will be nearer target if you leave interest rates at 3% than follow market expectations.

So are you actually sending a message than rates will peak nearer to 3%?

Andrew Bailey says the Bank doesn’t have a precise alternative rate path in mind.

But its best view is that the path of rates will be closer to the ‘constant rate curve’ than the ‘market rate curve’ is (updated) – ie, suggesting rates won’t rise over 5%.

Deputy governor Dave Ramsden chips in too, explaining that the Bank’s forecasts were based on the market expectations that rates peaked at 5.25% next year.

But as we flagged earlier, rates are current seen lower, at around 4.6% in 2023.

Bailey points out that it’s a “sign of the times” that the curve has fallen so much since the Bank’s cut-off point. That was the seven working days to 25th October – so it could produce a report today.

Updated

Q: Why should people be hit with higher interest rates when the economy is already falling into recession?

Andrew Bailey returns to his forward-defensive stroke, that not tackling inflation makes it worse.

Bailey: Mortgage rates should come down as market calms

Q: What’s your message to mortgage lenders who have been raising their rates in recent weeks, and to people who chose to lock in at those high rates?

Governor Andrew Bailey replies that there’s been a move to fixed-rate deals, rather than variable rates, in the UK housing market in recent years.

Those rates are priced off the market curve (where investors think Bank Rate will be in the future). So when that curve jumped (after the mini-budget), mortgage rates inevitably rose.

I would hope that is now calming, Bailey says, as the curve is coming down, and becoming more predictable.

And he warns lenders that he expects mortgage rates to fall:

That should be reflected through into mortgage rates.

These things have to be symmetrical in that sense.

That’s too late, though, for people who had to remortgage when rates surged over 6% last month, from around 4.75% before the mini-budget.

As Bailey points out:

It is very unfortunate that those who had to take out mortgages during this period have faced a much more difficult situation.

Q: Your forecasts show that inflation is closer to your target if interest rates remain at 3%, rather than rising to 5.25%. So is that [3%] where you think rates should peak at?

Bailey explans that the Bank won’t predict where the truth lies between the two, but it does think the higher path is too high.

Bailey: UK policy has been questioned by markets

Q: How much lasting damage has been caused to the UK economy since the last Bank press conference in August?

Andrew Bailey says there has been a ‘UK premium on rates’ recently.

He points out that UK government borrowing cost surged much faster than the US or eurozone government [after the unfunded tax cuts in the failed mini-budget spooked investors].

But that has now substantially unwound, he adds.

But still, Bailey warns that there has been “a questioning of UK policy” (he insists he’s not making a political point).

That has a lasting effect, and we need to work hard to put that in the past, Bailey says sternly.

Onto questions:

Q: How can the Bank justify making mortgage holders pay the price, when they already faces £3,000 energy bills, and rising taxes?

Governor Andrew Bailey says the Bank understands the challenges faced by mortgage holders.

But he reiterates that ‘there is no easy outcome’, and inflation will get worse if the Bank doesn’t take action to bring it down.

Secondly, Bailey says today’s action should not push up mortgage rates.

Instead, he claims “there is a downside path to mortgage rates”, as the market readjusts as the surge in borrowing costs after the mini-budget reverses.

And with some understatement, he adds:

This is a difficult time.

There ares ‘substantial upside risks’ to the path of inflation, Andrew Bailey cautions, although the Bank does forecast a steep fall in inflation….

… as this chart shows:

UK inflation forecast

Updated

Bailey: Rates will not rise as much as expected

Andrew Bailey says that the Bank thinks interest rates will not rise as sharply as the markets expect.

That means that the rates on new fixed term mortgages should not need to rise as much as they have done, he says.

He says:

“We can’t make promises about future interest rates, but based on where we stand today we think Bank Rate will have to go up by less than currently priced in financial markets”

Bailey explains that the Bank’s forecasts are based on rates peaking at 5.25% in the second quarter of 2023.

Currently, the money markets imply that UK interest rates will peak lower, though, at over 4.5% next summer.

Updated

Bank governor: Tough road ahead

Bank of England governor Andrew Bailey is holding a press conference now, to explain today’s interest rate rise to 3%.

Bailey explains that the Bank has lifted bank rate because inflation is too high, and it’s the Bank’s job to bring it down.

Low and stable inflation is the bedrock of a stable economy the governor declares.

He says supply chain problems after the pandemic, the Ukraine war, and the shrinking of the labour force have all pushed up prices.

Bailey also points out that inflation will even worse than the official reading of 10.1%, because the price of essentials has risen by more.

He warns that if the Bank does not act forcefully now, it will be worse later on.

And he adds that “It is a tough road ahead”, as shown by the Bank’s forecasts that Britain has entered a long recession.

Updated

Shadow chancellor Rachel Reeves has told Rishi Sunak to “face up to his mistakes” that have led to the “vicious cycle of stagnation”.

Responding to the Bank’s announcement, Reeves says:

“Families now face higher mortgages and more anxiety after months of economic chaos.”

“Today’s recession warning lays bare how 12 years of Tory government has weakened the foundations of our economy, and left us exposed to shocks, lurching from crisis to crisis with falling living standards and low growth.

“As Chancellor and now Prime Minister, Sunak must face up to his mistakes that have led to the vicious cycle of stagnation this Tory government has trapped us in.

“Working people are paying the price for Tory failure. Britain deserves more than this.”

From mid-2023, inflation was expected to fall sharply from its current double-digit levels, the Bank says.

It was then expected to decline to some way below the 2% target in two and three year’s time.

The UK could be facing the longest period of recession since reliable records began, if the Bank of England’s predictions are right, PA Media points out.

Its forecast that the economy could fall into eight consecutive quarters of negative growth, if current market expectations prove correct, would be the longest period of uninterrupted decline that the nation has experienced for around a century.

However, it would be a milder recession than in previous times.

From its highest to lowest point, gross domestic product (GDP) is expected to drop 2.9%, a much smaller decrease than the 6.3% drop seen during the 2008 financial crisis.

UK already in recession, warns Bank

The UK is already in recession, the Bank of England warns, and it could be a prolonged one too.

The Bank estimates that the UK entered recession in the third quarter of this year, as household incomes were squeezed by higher global energy and goods prices.

Alarmingly, it predicts that this downturn will last until mid-2024, based on market expectations for UK interest rates.

GDP will keep falling throughout 2023 and even in the first half of 2024, the Bank fears, as “high energy prices and materially tighter financial conditions weigh on spending”.

It warns:

The MPC’s latest projections described a very challenging outlook for the UK economy. It was expected to be in recession for a prolonged period and CPI inflation would remain elevated at over 10% in the near term.

Unemployment is expected to rise too, with the jobless rate seen hitting almost 6.5% by late 2025 – up from just 3.5% at present.

Updated

Inflation to hit 11%

Inflation is expected to peak at 11% in the current quarter, the Bank warns, up from 10.1% in September.

That would intensify the cost of living squeeze, but it’s actually lower than expected back in August before the Uk government’s energy price freeze.

Today’s rate rise wasn’t unanimous.

Seven of the nine policymakers on the Monetary Policy Committee voted to raise by 75 basis points, to 3% – a major moment as the BoE tries to cool inflation.

But one MPC member, Swati Dhingra, voted for a half-point rise to 2.75%, while another, Silvana Tenreyro pushed for an even smaller rise, to 2.5% (from 2.25%).

Updated

Bank: We've raised rates to bring down inflation

The Bank of England says it has raised interest rates, to 3%, to bring inflation down from its current double-digit levels.

Announcing today’s rate hike, it says:

Inflation is too high. It is well above our 2% target.

High energy, food and other bills are hitting people hard.

If high inflation continues, it will hurt everybody. Low and stable inflation helps people plan for the future.

Raising interest rates is the best way we have to bring inflation down.

We know that many people are facing higher borrowing costs. In particular, many households face higher mortgage rates. And some businesses face higher loan rates.

It’s our job to make sure that inflation returns to our 2% target.

This month we have raised our interest rate to 3%.

In total, since December 2021, we have increased our interest rate from 0.1% to 3%.

What will happen to interest rates will depend on what happens in the economy.

At the moment, we expect inflation to fall sharply from the middle of next year.

Bank of England interest rate decision

Newsflash: The Bank of England has raised UK interest rates by three quarters of a percentage point to 3%, the highest level since the financial crisis in autumn 2008.

Bank policymakers voted to lift borrowing costs, for the 8th time in a row, in an attempt to cool surging inflation and to prevent it becoming embedded in the economy.

It’s the largest rate hike since 1989 – apart from the almost immediately reversed rise on Black Wednesday in 1992 - and will hit mortgage payers on variable rate loans, and push up the cost of business loans and other credit.

Updated

Tension is mounting in the City, with just a few minutes to go until the Bank’s decision…

Savills forecast 10% fall in average UK house price in 2023

UK house prices are likely to fall 10% next year, estate agent Savills has predicted.

Savills have released fresh housing market forecasts, ahead of the Bank of England decision.

And they show that after over two years of strong growth, the average UK house price is expected to fall by 10% in 2023 when interest rates are expected to peak at 4%.

They also predict that housing transactions will fall to their lowest in over a decade next year, to below 900,000.

Savills adds:

On the assumption that interest rates gradually ease back from the middle of 2024, Savills is forecasting that values will begin to recover and that the average UK house price will rise by a net figure of +6% in nominal terms over the next five years.

This is expected to be accompanied by a fall in housing transactions to levels a little less than three quarters of the pre-pandemic norm, as first time buyers and buy-to-let investors bear the brunt of increased affordability pressures next year, when Bank base rate is expected to peak at 4.0%.

The prime market, for expensive houses, is expected to see smaller falls –- as wealthy buyers are less reliant on borrowing.

Updated

There’s thirty minutes to go until the Bank of England announces its eagerly awaited interest rate decision.

The money markets are still expecting the BoE to hike borrowing costs by 75 basis points, taking Bank Rate to 3%. That would be the biggest rate rise since the late 1980s.

Charalampos Pissouros, senior investment analyst at XM, sets the scene:

This will be the first meeting after the budget turbulence, but with the announced fiscal measures being scrapped and Liz Truss stepping down, expectations of a super-sized 100bps increment have eased.

The consensus of both investors and economists is now for 75bps.

Nonetheless, with Rishi Sunak’s government delaying its Autumn budget statement to November 17, there is the chance for BoE officials to play a safer card and hike by only 50bps, as the effects of future fiscal policy on the economy are difficult to be estimated now. Adding further credence to this view is the fact that the Bank itself is projecting a recession by the end of the year, so are disappointing PMIs for October.

Even if policymakers decide to go with 75bps due to inflation rebounding back above 10%, they may hint at slower hikes from December onwards, as the bleak economic outlook does not warrant more aggressive increments.

Both these scenarios may prove negative for the pound, with the former having the potential to throw it off the cliff. For the pound to rally and maintain any decision-related gains, the Bank may have to signal that more triple hikes are in the pipeline, a case that seems unlikely.

A hike in UK interest rates today will plunge more workers into debt and financial hardship, the Unite union has warned.

A survey of 6,000 adults for Unite found that just over half said they cannot or will have difficulty paying their household bills this year.

Almost a third said they have already gone into debt or increased the levels of their debt just to put food on the table, with 14% saying they face food poverty.

Unite general secretary Sharon Graham said:

“Unite’s research shows that many workers face unsurmountable financial pressure.

An interest rate hike will shackle those workers with more debt while corporate profiteering runs rampant.”

The poll also found that 70% of workers have experienced a real-terms pay cut this year, with wage rises failing to keep up with inflation.

Traders are selling sterling on expectations the Bank of England will strike a less aggressive tone than the Federal Reserve did last night, Reuters says.

Unlike the Fed, the BoE is grappling with a sharply slowing UK economy and the aftermath of the government’s disastrous mini-budget.

So while it may hike rates by an historically large three-quarters of a percent today, to 3%, the Bank may resist further hikes of such size.

Lee Hardman, currency analyst at MUFG, told clients:

“We expect the BoE to signal that a larger hike today is unlikely to be the first of a series of larger hikes and that market expectations for further hikes are likely still too aggressive.

“It should encourage a weaker pound.”

Pound losing ground ahead of BoE decision

The pound has weakened this morning, as markets brace for the Bank of England’s interest rate decision at noon.

Sterling has hit its lowest level against the US dollar since Rishi Sunak became PM, shedding a cent and a half to $1.124.

That’s mainly due to dollar strength after last night’s interest rate hike across the Atlantic.

But, the pound has also dropped over half a cent against the euro, to €1.154, after European Central Bank chief Christine Lagarde warned that a “mild recession” in the eurozone will not be enough to tame inflation.

That’s a hint that eurozone interest rates will keep rising, strengthening the euro.

Neil Wilson of Markets.com says:

The moves in sterling this morning indicate everyone expects a very cautious Bank of England will say 75bps is not the new normal, citing downside risks to the economy and the tighter fiscal policy.

Activists from Extinction Rebellion locked to an oil barrel as they protest outside the offices of JP Morgan in Glasgow.
Activists from Extinction Rebellion locked to an oil barrel as they protest outside the offices of JP Morgan in Glasgow. Photograph: Andrew Milligan/PA

Up in Glasgow, climate activists are protesting outside a bank where they demonstrated every day during Cop26 a year ago, PA Media reports.

Four Extinction Rebellion Scotland (XR) activists locked themselves to an oil barrel with “JP Morgan” written on it at the main entrance to the bank’s offices in Waterloo Street, Glasgow, on Thursday morning.

Gravestones with the words “Cop26 Failed” and “Cop27 Futile” were placed on the pavement and activists hung up banners reading “JP Morgan - World’s Dirtiest Bank” and “Greenwash won’t wash”.

During the Cop26 climate change talks which took place in Glasgow last November, Extinction Rebellion protested every day at JP Morgan’s offices in the city.

Activists from Extinction Rebellion locked to an oil barrel as they protest outside the offices of JP Morgan in Glasgow.

The action on Thursday took place ahead of the Cop27 talks that start in Sharm El Sheikh, Egypt, on Sunday.

XR Scotland claims JP Morgan is funding the climate crisis.

Gary Jack, from XR Highlands and Islands, said:

“Even JP Morgan’s own economists reported in February 2020 that the climate crisis threatens the survival of humanity and yet they are still actively promoting continued investments in fossil fuels.”

UK services sector shrinks after mini-budget hit economy

Britain’s service sector has shrunk for the first time since the pandemic lockdowns of 2021, as the disastrous mini-budget hit confidence.

Service sector activity fell in October for the first time since February 2021, acccording to the monthly survey of purchasing managers from S&P Gobal Insight.

Its services PMI dropped to 48.8 in October, down from 50 (showing stagnation) in September. It’s the latest sign that the economy is weakening, heading towards recession, which will worry the Bank of England.

Services companies suffered from shrinking demand and greater risk aversion among clients, while “escalating energy bills and strong wage pressures” pushed up costs again.

A number of firms said political uncertainty since the mini-Budget, which drove up borrowing costs before it was reversed, had damaged business investment, and deterred clients from agreeing new projects.

The reading is slightly better than the ‘flash’ PMI taken during October, suggesting the recent stability has helped the economy.

Tim Moore, economics director at S&P Global Market Intelligence, says:

“UK service providers reported the steepest drop in business activity for 21 months in October as household spending cutbacks and shrinking business investment combined to dent new order volumes.

A number of firms noted that political uncertainty and rising borrowing costs since the mini-Budget had led to greater risk aversion among clients and a wait-and-see approach to new projects. There were also many reports that higher energy bills had led to reduced spending on non-essential services.

Business confidence also fell, hit by stubbornly high inflation, increased borrowing costs and worries about the UK economic outlook, Moore added:

Aside from the slump at the start of the pandemic, the degree of confidence across the service economy is now the lowest since December 2008.”

Updated

BT warns of more job losses as rising bills force bigger cost-cutting drive

BT has warned of more job cuts after it was forced to find more than £500m in additional savings due to soaring inflation and energy bills.

The company, which reported an 18% slump in pretax profits from just over £1bn to £831m year-on-year in the six months to the end of September, said its energy bill will be £200m higher this year.

The telecoms company said it has been forced to raise its cost-savings target from £2.5bn to £3bn by the end of its financial year in 2025 in response to inflation hitting a 40-year high and a surge in energy costs.

“We are leaving no stone unturned to make sure BT can be the most-efficient organisation it can be,” said Philip Jansen, the chief executive at BT, adding:

“Inevitably it means some jobs will not exist in the future but that has been true of the last few years too. We will use natural attrition as much as we can. In these difficult conditions we know we have to double down on our costs.

There are no specific numbers in mind. This [cost-cutting programme] is up until the end of 2025.”

Norway’s central bank (Norges Bank) in Oslo
Norway’s central bank (Norges Bank) in Oslo Photograph: Reuters

Over in Oslo, Norway’s central bank has hiked its benchmark interest rate by a quarter-point, to 2.5%.

Norges Bank also predicted it will probably raise rates again in December to help curb inflation.

Governor Ida Wolden Bache said in a statement.

“We are raising the policy rate to curb inflation,”

Norges Bank also warned that “the outlook is more uncertain than normal”, so the future path of rates will depend on how the economy evolves.

The UK housing market is already under pressures, even before another rate rise today.

Yesterday, the Treasury Committee were told that rising mortgage costs were hitting mortgage holders and renters.

Ray Boulger, senior mortgage technical manager at broker John Charcol, told MPs that the buy-to-let rental market was feeling the squeeze hardest.

“I think the buy-to-let market is where we’re likely to see a lot more stress than the residential market.

“When you factor in the other impact of energy price increases and cost of living increases that can have a significant impact on what people can borrow.”

Lenders also expect house prices to drop next year, having already fallen in October according to the Nationwide Building Society.

Chris Rhodes, Nationwide’s chief finance officer, told the committee that the building society’s central scenario is that prices fall by 8% to 10% next year.

The “worst case” scenario is potentially a 30% crash (but Rhodes insists that was not likely. There’s much uncertainty in such predictions.)

He said:

My best case is slowly increasing house prices and my worst case is potentially a 30% fall, but those are the two extremes which are tail probabilities.

Updated

Sainsbury’s has ordered more turkeys for Christmas this year, says CEO Simon Roberts, as he outlines today’s financial results.

That will give Britain’s second-biggest supermarket a buffer in case avian flu hinders supply, he explains.

Orders to keep all captive birds and poultry indoors are being extended across the whole of England from next week, amid the UK’s largest ever outbreak of avian influenza.

Last month, the National Farmers’ Union warned that Christmas turkey supplies could be at risk if the outbreak continues to spread.

Here’s our full story on Sainsbury’s, by my colleague Sarah Butler.

Chancellor Jeremy Hunt is facing calls to come to the House of Commons or give a press conference to explain how mortgage-holders will be helped, if the Bank hikes interest rates as expected today.

Liberal Democrat Treasury spokeswoman Sarah Olney said:

“The Chancellor must address the country immediately after the rate rise decision to spell out a plan to save homeowners on the brink.

“He should either come to Parliament or hold a press conference to announce support for families facing mortgage bill rises worth hundreds of pounds a month.

“Hard-working families are being left to pay the price for weeks of Conservative chaos.

People are desperately worried about how they are going to pay these frightening mortgage payments after tomorrow.

“The Government cannot hide away, especially after their long list of economic failures.”

European stock markets have opened lower, after America’s central bank warned last night that US interest rates will peak higher than expected.

The UK’s FTSE 100 index of blue-chip shares has dipped 40 points, or 0.5%, in early trading.

Germany’s DAX and France’s CAC are both down 1%.

Sainsbury's: life is tough for millions of households

The boss of supermarket chain Sainsbury’s has warned that life is “tough for millions of households”.

Chief executive Simon Roberts pointed to the squeeze on families as Sainsbury’s reported an 8% drop in profits for the first half of the year.

Roberts said the group, which has given low-paid shop workers a second pay rise this year, was investing in keeping prices down for customers.

He says:

We really get how tough it is for millions of households right now. Customers are watching every penny and every pound and we know that they are relying on us to keep food prices as low as we can.

We will have invested more than £500m by March 2023 in keeping prices lower by cutting our costs at a faster rate than our competitors, meaning we have more firepower to battle inflation.

Roberts has also told reporters that Sainsbury’s is seeing a significant move towards customers buying own-brand goods, with customers also buying some Christmas items early to spread out the costs.

He isn’t over-optimistic about a surge in sales from the men’s football World Cup.

Shares in Sainsbury have jumped 3% in early trading, as underlying pre-tax profits were higher than the City had expected.

Updated

Twitter may ‘halve its workforce’ as key investor backs job cuts

Elon Musk's photo is seen through a Twitter logo.

Elsewhere this morning, there are reports that Elon Musk has drawn up plans to fire as much as half of Twitter’s 7,500-strong workforce.

The major cost-cutting overhaul, just days after Musk took control, could come on Friday. Musk is also expected to order remaining staff to return to the office, rather than work from home.

One investor is backing job cuts, as my colleague Dan Milmo reports:

Changpeng Zhao, the chief executive and founder of Binance, said “a slimmer workforce would make more sense” at the social media platform. The cryptocurrency exchange has invested $500m (£441m) in Twitter as part of Musk’s $44bn takeover, which completed last week and has been followed by a stream of changes and mooted overhauls of the company ever since.

According to the latest reports, in the Verge and on Bloomberg overnight, Musk is planning to cut about 3,800 jobs, with staff affected by any layoffs at the San Francisco-based company told as soon as Friday.

Zhao said on Thursday, before the Verge and Bloomberg reports were published, that Twitter has been too slow in rolling out new features under its previous ownership.

Here’s the full story:

An exodus of senior management at Twitter is already underway. The company’s advertising and marketing chiefs have recently announced their departures, as well as the chief people and diversity officer, the general manager for core technologies, the head of product and vice-president of global sales.

Last week, Elon Musk fired the CEO, Parag Agrawal, the chief financial officer, Ned Segal, and the legal affairs and policy chief, Vijaya Gadde, shortly after taking over the company.

People are also facing higher prices at the fuel pumps again, as well as rising borrowing costs, as my colleague Alex Lawson explains:

Drivers experienced a “severe shock” after the price of diesel shot up in October amid the fallout from the Opec+ oil cartel’s decision to cut production, the RAC has said.

The price of diesel rose by 10p a litre to 190.5p on average – the third worst monthly increase on record, behind previous increases this year, data from the motoring group showed.

The RAC said a full tank of diesel rose by more than £5 to £105 as prices threatened to creep towards the all-time high of 199.09p a litre in late June.

The data showed the price of petrol increased, although less than diesel – up by nearly 4p a litre from 162.67p to 166.38p. That meant a full tank costs £2 more at £91.51.

Here’s the full story:

Bank of England decision: What the experts say

Craig Erlam, senior market analyst at OANDA, says the Bank of England has an unenviable task setting interest rates, given the disruption in Westminster:

The Bank of England will likely join the Fed in raising rates by 75bps later today.

The central bank has had the unenviable job of fighting soaring inflation amid enormous economic and political uncertainty. In recent months the country has had three Prime Ministers, three very different economic agendas, and no budgets outlining them. Not ideal for a central bank that’s fighting double-digit inflation.

It hasn’t handled things perfectly this year either, that’s clear. It’s taken a far more cautious approach than others leaving it in the situation now that it must raise rates aggressively and publish economic forecasts with little insight into government spending and tax plans. The outlook is uncertain enough without that.

Victoria Scholar, head of investment at interactive investor, predicts the Bank could be divided today – with some policymakers pushing for a smaller rate rise of half-a-percent:

The Monetary Policy Committee’s vote is likely to be divided with the potential for a less aggressive 50 basis point hike instead. The size of the increase will signal how concerned Bank of England policymakers are about inflation versus a recession as it looks to curtail further price rises without inadvertently causing unnecessary economic pain.

An estimated two million borrowers on variable rate mortgages look set to face increased payments after today’s decision while around another two million are on fixed-term mortgages which need re-mortgaging, some at higher rates by the end of 2024.

The mortgage market has been in turmoil during the aftermath of the mini-budget sending rates soaring and leading to the withdrawal of some products temporarily from the market. However the market has since calmed down thanks to the new government which has reinstated some sense of political stability.

Jim Reid of Deutsche Bank reminds us that the markets had anticipated a much higher rate rise, before the mini-budget unravelled:

Since the BoE’s last meeting in September, an awful lot has happened in the UK, including a mini-budget that triggered market turmoil, a temporary BoE intervention to buy longer-dated gilts, a policy reversal on most of that mini-budget, and then Liz Truss’ replacement as PM by Rishi Sunak. That volatility has been reflected in market pricing for today’s decision as well.

Straight after the last meeting, overnight index swaps were pricing in a 75bps hike, but at the height of the mini-budget turmoil they went as far as pricing in more than 200bps worth by today, including a decent chance of an intermeeting hike. However, as the situation has calmed down, pricing has returned to its original starting point of a 75bps hike again, which is what our UK economist is forecasting for today as well.

Reeves: rate rise will be blow to families and businesses

Labour’s shadow chancellor Rachel Reeves warns that another interest rate rise today will hurt businesses and households, and hit growth in the economy.

She’ll tell the Anthropy conference in Cornwall that the government’s failure to tackle weak growth, low productivity, underinvestment and widening inequality has left the UK particularly exposed to economic shocks.

Reeves is expected to warn that:

“Rising interest rates will mean families with already stretched budgets will be hit by higher mortgage payments.

“It will mean higher financing costs for businesses.

“For many firms who have had a tough couple of years this will mean desperately difficult decisions about whether to carry on.

“And it will mean profound implications for growth as demand is sucked out of the economy and even those firms who are keeping their head above water face difficult decisions about whether to invest or expand.

Updated

Rate rise would drive up mortgage costs

Mortgage rates are expected to jump on Thursday in response to the largest increase in the Bank of England’s base rate since 1989, as the central bank tries to bring down an inflation rate expected to remain in double figures until at least next spring.

Homebuyers with tracker or variable rate mortgages will feel the pain of the rate rise immediately, while the estimated 300,000 people who must remortgage this month will find that two-year and five-year fixed rates remain at levels not seen since the 2008 financial crisis.

The average two-year fixed rate has fallen to 6.47% from 6.65% in mid-October – as the effects of the disastrous Kwasi Kwarteng mini-budget ease – but remains three times the rate offered by lenders earlier this year.

A five-year fixed rate mortgage that could be bought for 6.51% on 20 October has slipped only marginally to 6.31%.

Introduction: Bank of England to raise rates today

Good morning, and welcome to our rolling coverage of business, the world economy, and the financial markets.

All eyes are on the Bank of England this morning. The UK central bank is on track for its biggest interest rate rise in decades, as it tries to get a grip on stubbornly high inflation.

The BoE is expected to raise its key rate by three-quarters of a percent, taking Bank Rate from 2.25% to 3%, the highest since autumn 2008, at one of the most eagerly anticipated monetary policy meeting for many years.

It would be the eighth rate hike in a row, driving up borrowing costs even as the country risks falling into recession.

A 75 basis-point rise would be the biggest rate hike since 1989 (if you exclude the mayhem on Black Wednesday when rates were briefly hiked skyward from 10% to 12%, in vain).

The Bank will be determined to tighten monetary policy after seeing consumer price inflation hit a 40-year high of 10.1% in September, five times higher than its 2% target, driven by soaring food prices as well as the energy crunch.

It fears that high inflation will set off a wage-price spiral, with workers (understandably) seeking pay rises to protect them from the cost of living squeeze.

Shweta Singh, senior economist at fund manager Cardano, says the Bank faces a very difficult task:

The BoE is faced with an incredibly difficult balancing act of orchestrating large rate hikes in a recessionary economy. Markets are pricing in a terminal rate of 480 bps by September 2023, which is 100bps lower than during early October, but is pretty punchy nonetheless.

The Bank also wants to reassure markets, after the turmoil caused by the disastrous mini-budget which sunk the pound and drove up government borrowing costs.

But policymakers are operating in the dark, after chancellor Jeremy Hunt’s fiscal statement outlining tax rises and spending cuts was delayed until November 17th.

It has been scheduled for three days ago, so the lack of clarity over government policy makes the BoE’s task harder.

Singh explains:

“If September’s fiscal uncertainty was centred around how loose government policy would become, November’s uncertainty is centred around how tight it is set to become.

And, if September’s dilemma for the Bank was that they might not be doing enough tightening, November’s dilemma is that they end up doing too much. It seems therefore that the MPC is still stumbling around in the dark.

The markets are already jittery, after the US central bank raised its key lending rate by another three-quarters of a percent last night, and dampened hopes that it might ease off soon.

Wall Street sank after Federal Reserve chair Jerome Powell warned that US interest rates may peak higher than expected, and remain high longer than hoped to squeeze out inflation.

Powell warned that it was “very premature” to be thinking about pausing rate hikes, and cautioned that:

“Data since our last meeting suggests that the ultimate level of interest rates will be higher than expected.

We also find out how the UK and US services sectors fared during October, plus the latest eurozone unemployment stats.

The agenda

  • 9am GMT: Norway’s Norges Bank interest rate decision

  • 9.30am GMT: UK service sector PMI for October

  • 10am GMT: Eurozone unemployment rate for September

  • Noon GMT: Bank of England interest rate decision

  • 12.30pm GMT: Bank of England press conference

  • 2pm GMT: US service sector PMI for October

Updated

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