Rise in interest rates would be the largest in 33 years and would put more pressure on borrowers
The Bank of England considered the largest interest rate hike in 33 years to address surging inflation, a move expected to cost millions of households more than £3bn in additional mortgage costs. City investors expect Threadneedle Street to hike interest rates by no less than 0.5 percentage points, or even 0.75 percentage points, on Thursday at the next meeting of its monetary policy committee (MPC).
Nonetheless, the bank settled for 0.5 percentage points, increase interest rate to a 14-year high.
In a development piling more pressure on borrowers, an increase from the present level of 1.75% would seek to emphasize the central bank’s commitment to fighting inflation, which is at its largest levels since the early 1980s.
Trading in financial markets indicates an 80% chance of a 0.75 percentage point hike, which would mark the largest single rate rise since 1989, when inflation was surging during a consumer boom before the start of the early 1990s recession.
However, experts said the Bank proceeding with the largest rate rise for more than thirty years would mean an additional £3.1bn of interest payments for borrowers on standard variable rate and tracker mortgages.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said:
“For anyone who is already struggling with runaway price rises, the extra cost of the mortgage could be the final straw.”
The investment firm said seventy-five percent of mortgage holders are on fixed rates, suggesting they would not see an instant impact, but that over 2 million borrowers are on standard variable rates or trackers.
“While anyone with a fixed rate is currently protected, all these rate rises will be adding up and hit them in one fell swoop when it’s time to remortgage. If you have less than six months left to run on your mortgage deal, it makes sense to lock in a new fixed rate as soon as possible, ahead of potential rate rises.”
For the average UK property, with a 75 percentage point loan-to-value-mortgage, a rise of 0.75% would indicate a £78 rise in monthly interest payments, according to estimates by TotallyMoney. Fixed-rate deals are expected to expire for as many as 3.2 million borrowers within the next two years.
Alastair Douglas, the chief executive of TotallyMoney, said:
“It’s clear that something needs to be done [about high inflation] – but is this the way? The latest interest rate hike is being closely followed by a new, higher energy price cap, further compounding pressure just as we head into the cold winter months.”
Threadneedle Street delayed the meeting of the MPC by a week until after the period of national mourning for the death of the Queen, with its decision projected to follow a steep increase in borrowing costs reported by the US Federal Reserve on Wednesday.
It comes as the Sterling has plunged to its lowest level compared to the dollar since 1985, caused by the strength of the U.S. dollar but also by worries over the UK’s economic outlook, Liz Truss’s plans for a sharp increase in government borrowing and possible interference with the Bank’s independence.
Climbing energy prices and the jumping cost of a weekly shop have pushed up inflation to almost five times the Bank’s 2% goal rate.
The MPC’s rate decision comes a day ahead of Kwasi Kwarteng reading his mini-budget to the House of Commons, amid expectations for extensive tax cuts in addition to already introduced measures capping average energy bills at £2,500 for a normal household and providing equivalent support to businesses.
Economists said the cap on bills would help to curb headline inflation from surging much further than the current rate of 9.9%, while the Bank will be broadly expected to revise its forecasts. However, the broad-based support scheme, which has been greatly condemned for failing to pick out those most in need, could also risk stoking fueling for goods and services – acting to stoke inflationary pressures.
Borrowers will also encounter a jump in costs as the central bank pushes up interest rates, with financial markets expecting the Bank’s base rate to hit 4.5% by March 2023. Ross Boyd, founder of the mortgage comparison platform, Dashly.com, said a rate rise of 0.75 percentage points this week would “send shockwaves” through the property market.
“Yes, rates will still be low compared to their historical average but a huge amount of homeowners and buyers have never known rates this high.”