UK Homeowners Brace for More Pain as Bank of England Poised to Raise Interest Rates Again

Homeowners are in for a rough ride as the Bank of England is set to raise interest rates again. Analysts predict that the base rate, currently at 4%, will increase by 0.25 points, bringing it close to pre-Credit Crunch levels. The decision is expected to be announced at noon today.

Market anxiety, fueled by the Silicon Valley Bank and Credit Suisse meltdowns, had left markets split over whether Threadneedle Street would continue with the run of 10 consecutive interest rate increases. However, yesterday’s shock rise in inflation, with CPI climbing from 10.1% to 10.4% in the year to February, has put pressure on the Bank to raise rates.

The US Federal Reserve also raised interest rates by 0.25 points overnight, meaning that traders will be taken by surprise if UK rates do not follow suit. The rise in rates will further tighten the squeeze on families already struggling to deal with the cost of living crisis.

The higher CPI is attributed to salad and vegetable shortages coupled with a spike in cost at restaurants and pubs. The inflation figures have taken the market by surprise, with an increase of a quarter percentage point seen as 95% certain.

At the Budget last week, Jeremy Hunt paraded forecasts by the Office for Budget Responsibility (OBR) that inflation will fall to 2.9% by the end of this year. However, the Chancellor has stated that “Falling inflation isn’t inevitable, so we need to stick to our plan to halve it this year.”

The pound rose by more than a cent against the dollar to just shy of $1.23 in the hours after the figures were published on elevated expectations of a rate hike. The Bank of England has been striving to bring inflation back down towards its 2% target, but some members of its rate-setting committee have been arguing that signs of easing inflation over the coming months mean that it should pause.

While Investec Economics predicts that the Bank will opt for a “wait-and-see approach” and keep rates at 4% while it assesses the situation, ING Economics suggests that the Bank will want to see more evidence that inflationary pressures are easing up more broadly before ending its cycle of rate hikes.

We’ll keep you updated on this developing situation.