British households are facing the possibility of five interest rate hikes in the next year, which could increase borrowing costs and worsen the financial burden on mortgage holders. The current interest rate is 3.75%, and investors are betting that it will rise to 5% by November next year.
This prediction is based on the expectation of a fresh energy price shock this winter, which could drive inflation higher. The consumer prices index is already above the 2% target, at 3.1% in August.
Divided Opinions on Interest Rate Hikes
Many economists disagree with the investors’ predictions, believing that interest rates will not rise as much as expected. Kallum Pickering, chief economist at Peel Hunt, said that he expects the Bank of England to hold interest rates for the rest of the year and then cut them twice next year once inflation risks fade.
Pickering’s view is shared by other economists, who argue that the financial markets are overestimating the risk of inflation and the need for interest rate hikes. Martin Beck, chief economist at WPI Strategy, said that he does not think there will be any rate rises, and that the next move in rates will be down, possibly in early 2027.
The Bank of England’s decision on interest rates is expected to have a significant impact on households with mortgages and other borrowers. If interest rates rise, it could lead to higher borrowing costs and reduced consumer spending.
The prospect of interest rate hikes is already wreaking havoc on global bond markets, with UK borrowing costs hitting their highest levels since 1998.
Anthony Brinkman, high yield portfolio manager at Principal Asset Management, said that the recent gilt market movements seem to be intent on showing central banks that they are out of time, and that the market is expecting action to be taken.
The Bank of England’s governor, Andrew Bailey, has signalled concern over inflation as energy prices surge.
The UK labour market remains a key factor in the interest rate decision, with weak wage growth and a cooling jobs market easing inflation fears. Suren Thiru, chief economist at ICAEW, said that a cooling jobs market is currently the last line of defence against a rate hike, and that weak wage growth suggests that raised employment costs and softer hiring demand are holding back pay rises.
The Bank of England’s decision on interest rates will be closely watched by households and businesses, who are already facing higher costs due to the conflict in the Middle East and the resulting increase in oil and gas prices.
Kallum Pickering, chief economist at Peel Hunt, said that rate rises cannot produce barrels of oil, and that with second-round effects so far subdued, the lesser evil would be for the Bank to tolerate a temporary overshoot rather than inflict further damage on an already weak economy.
Impact on Households and Businesses
Suren Thiru, chief economist at ICAEW, said that a cooling jobs market is currently the last line of defence against a rate hike. The UK labour market remains locked in a low-hire, low-fire funk, with sky-high labour costs and domestic policy uncertainty encouraging firms to tread more cautiously on hiring and pay. Weak wage growth suggests that raised employment costs and softer hiring demand are holding back pay rises.
Food prices are expected to soar over the next two years, with energy prices forecast to jump 25% in January. This could push inflation above 4% next year, ramping up pressure on the Bank of England to hike rates.
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