Almost 1.5 million homeowners with variable rate mortgages face higher borrowing costs with the Bank of England expected to push up interest rates on Thursday to 4.5%.
City analysts polled by Refinitiv were unanimous in forecasting the central bank would increase its base rate by 0.25 percentage points when policymakers meet to tackle Britain’s stubbornly high inflation rate.
Another 1.5 million households with fixed-rate mortgages will see their annual bills spiral by an average £3,000 when they refinance their loans this year, afterthe average two-year fixed rate jumped from below 2% to 4.75% over the past 18 months.
“It is very difficult to see the Bank of England doing anything else,” said George Buckley, chief UK economist at Nomura. “According to the markets, there is only a 4% chance of them holding rates where they are.”
In March, the consumer prices index (CPI) dipped only sightly to 10.1%, down from 10.4% in February – higher than the 7% inflation rate in the 20-member euro currency bloc and 4.9% in the US.
While the BoE’s monetary policy committee (MPC) has forecast a drop in inflation to below 1% in two years based on the current level of interest rates, it has argued that progress is too slow.
In a recent speech, chief economist Huw Pill urged British households to restrain pay demands and businesses from hiking prices, saying they “need to accept” they are poorer.
Pill said a game of “pass the parcel” was taking place in the economy – as households and companies try to pass on their higher costs.
Most analysts believe inflation will tumble by the end of the year to below 5%, dragged lower by falling food and energy prices. These same forecasts show inflation sliding during 2024 to below the central bank’s 2% target.
However, a growing number of economists have argued that core inflation, which strips out volatile elements such as energy and food, has remained “sticky” and could spur the BoE to continue pushing interest rates higher this summer.
Buckley said a split on the nine-strong MPC was likely, repeating last month’s vote when Silvana Tenreyro and Swati Dhingra, both on secondment from the London School of Economics, voted against a rise, saying higher borrowing costs would prompt a bigger slowdown than expected, plunging the UK into a recession and bringing forward the point at which rate cuts would be required.
The rest of the committee, including the governor, Andrew Bailey, is expected to back the increase to 4.5%.
Samuel Tombs, chief UK economist at the consultancy Pantheon Macroeconomics, said the BoE will “hint” that it does not expect to raise rates again.
“But we doubt that the [monetary policy]committee will have the conviction required to make a bold, market-moving statement that this tightening cycle is over, given the extent to which the macro data have surprised its expectations to the upside in recent months,” he said.
The positive economic data includes business surveys that have proved more optimistic than expected and high levels of employment. Average wages, though well below the level of inflation, have remained higher than the Bank of England would want.
Figures on Friday are likely to show the economy avoided contracting in the first quarter of the year, adding to the conviction among MPC members that the economy has proved more resistant to dampening effects of higher interest rates than expected.
Sanjay Raja, chief UK economist at Deutsche Bank, said the outlook was not so rosy. “Despite some recession clouds parting this year, the UK is not out of the woods yet. Tighter monetary policy continues to feed through slowly but surely,” he said.