The Bank has already carried out three consecutive interest rate hikes taking the base rate back to pre-pandemic levels of 0.75 percent. A vote next week to hike again by 0.25 percent would see it reach levels not seen since 2009 however the persistence of inflation in the UK could mean rates rise higher still. Analysts at consultancy Capital Economics now predict the base rate could reach as high as three percent next year Chief UK Economist Paul Dales noted the Bank was keen to “contain domestic price pressures and stamp out the recent rises in price expectations”.
The Bank is particularly concerned about second-round effects of inflation which could see price rises sticking around longer.
Although many of the initial drivers of inflation have been external factors such as surging energy prices, companies have begun putting up prices to pass on the rising costs with workers also seeking higher pay rises to help cope with the rising cost of living.
With a current shortage of workers in many sectors firms have been forced to raise pay even if it means in turn raising prices further.
Mr Dales explained: “Our forecasts envisage inflation being higher, GDP growth being lower and interest rates rising further than investors and other analysts expect.”
With inflation predicted to hit a 40 year high of 10 percent in October Capital Economics forecast a 3.3 percent fall in household disposable income.
A rise in interest rates to three percent would come as a major shock to mortgage holders with borrowing not happening at such levels since 2008.
According to website Moneyfacts the average price of a two year fixed mortgage already reached its highest since 2015 in April at 2.86 percent.
For those on variable rates banks have so far generally been quick to pass on the rate hikes meaning rising payments have been immediately felt for these homeowners.
Were interest rates to rise to three percent this would represent an extra 2.25 percent for those on variable rates, meaning someone with a £200,000 mortgage would be left paying around £375 more a month if the full increase was passed on.
So far increases in interest rates have not been enough to reduce demand for property though with house prices still increasing at record rates.
However further hikes, combined with savings being eroded by rising living costs, are predicted to see the housing market cool this year.
In a trading update today housebuilder Persimmon said it was “mindful” of uncertainties such as rising interest rates and inflation.
As well as a slowdown in the housing market a key concern for the Bank of England though will be how much of a risk rising interest rates poses to UK growth more broadly.
DON’T MISS:
Food prices to surge on Indonesian palm oil ban [ANALYSIS]
Now price hell hits PRIMARK with chain to up costs [LATEST]
Public offered finders fee as Lidl plots expansion [SPOTLIGHT]
Growth has already been under threat with consumers reigning in spending due to rising living costs posing a threat to businesses, particularly in the retail sector.
Some economists such as former Bank of England committee member Danny Blanchflower have warned rising interest rates potentially threaten to tip the UK into a recession by constraining growth further.
Bank of England Governor Andrew Bailey has even acknowledged the risks of “over-tightening”.
At a recent meeting of economist at the International Monetary Fund Mr Bailey accepted the concerns of economist Helene Rey who said “we need to be very careful about the danger.”
Mr Dales warned that even though the UK would reach the “brink of recession” by October, the Bank would however likely still push ahead with the predicted rises.
Credit: Source link
