Biggest interest rate rise in 30 years set to come – what will it mean?

The Bank of England looks set to raise interest rates at its meeting tomorrow – and it could be the biggest rise in 33 years.

The market is pricing in a rise of 0.75% to 3% because the Bank is tightening monetary policy in a bid to tame inflation.

And with the Chancellor’s fiscal statement delayed, the Bank will not know what the government’s plans are for public finances as it makes the rates decision.

That is leading to concerns that spending cuts and tax hikes could lead to a recession worse than previously forecast.

‘They have a pretty clear timetable laid out’

Susannah Streeter, a senior investment and markets analyst at Hargreaves Lansdown, said: “Bank of England policymakers may not be equipped with an aide memoire of a fiscal statement to work out how much corrector pen it needs to try and erase inflation, but they have a pretty clear timetable laid out about the course the economy is set to take.

“The price spiral is a tough, particularly with labour shortages fuelling wage growth and volatile energy prices to navigate.

“However, they no longer have to deal with the threat of a mass tax cut fuelled burst of stimulus.

“Instead, we have a new Chancellor flagging that spending will be reined in, just at the moment consumer confidence is plummeting and the housing market is going into shock.”

‘Risks of a deeper recession have grown’

She added: “Now that risks of a deeper recession have grown, the Bank of England is not forecast to mega size a rate hike this time round, but to opt for a still hefty 0.75 of a percentage point rise, taking the base rate to 3%.

“Inflation may well now peak above 11% with scorching food prices pushing up expectations.

“So, the Bank is still set to signal a further tightening of monetary policy, with financial markets now expecting that interest rates will reach around 5% next year before declining, as the impact of the recession, lower commodity prices and an easing off of supply chain snarl ups feed through.”

‘Market is pricing in a rise of 0.75% to 3% this week’

Sarah Coles, a senior personal finance analyst at Hargreaves Lansdown, said: “The market is pricing in a rise of 0.75% to 3% this week.

“The strange state of the market right now means this isn’t going to mean a big bump in savings rates or mortgage rates for most people, so we need to understand what’s going on in order to work out the best possible approach for our money.

“For anyone on a variable rate mortgage – like a standard variable rate or a tracker mortgage – much of this rate rise is likely to be passed swiftly through into your monthly payments.

“If you have a £250,000 mortgage over 25 years, at the Moneyfacts average mortgage rate of 5.4%, and the full rate was passed on, it will mean a rise in monthly mortgage payments from £1,520 to £1,643 – so you would need to find another £123 a month.

“For anyone whose fixed rate deal has come to an end who decided to revert to the SVR and wait to see what happens to fixed rates, it could end up causing the kind of headaches you may have been trying to avoid.”

Since 1975 the base interest rate had not been below 4%

Iain McKenzie, the chief executive of The Guild of Property Professionals, noted that since 1975, the base interest rate had not been below 4% until it dropped to 3.75% and then 3.5% in 2003, which was the lowest it has been in 28 years.

Before the global financial crisis, interest rates went up to 5.75%, before they were dropped to 0.5% in 2009.

Since then, interest rates have remained low until this recent hiking phase.

He said: “Inflation is at its highest level for over 30 years and the mechanism the Bank of England uses to try and curb and control it is the interest rate.

“High inflation causes many economy issues and at a rate of 10%, which is well over the 2% target, it needed to be addressed.

“If the Bank of England continues pushing up rates we could get to a point where a 5% mortgage rate is the norm, and that’s what agents should be telling buyers, it is the norm and not what they should be focusing on.”

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