The spotlight is back on the Bank of England as policymakers prepare to implement their fourteenth consecutive interest rate hike.
This move comes as the bank continues its prolonged struggle against surging inflation.
The upcoming decision is expected to have significant implications for borrowers, particularly those with variable-rate mortgages and prospective homebuyers.
Cost of Borrowing Set to Soar
The anticipated rate hike would push the cost of borrowing above 5%, marking the highest rate since the 2008 financial crisis.
Monthly repayments for variable rate mortgages would increase, impacting homeowners, while new home loan prices for first-time buyers and those re-mortgaging from fixed-rate deals would also be affected.
Uncertainty Surrounding the Magnitude of the Hike
City forecasters hold differing views on the potential size of the rate increase.
While some expect a quarter-point rise to 5.25%, others predict a half-point hike to 5.50%.
The Monetary Policy Committee had previously opted for the larger half-point move in June, demonstrating its commitment to curbing inflation, which, although down from its peak, remains significantly above the BOE’s 2% target.
Energy Price Shock and Cost-of-Living Crisis
The surge in energy and fuel prices following Russia’s invasion of Ukraine caused a shock to the economy, leading to a widespread increase in prices and exacerbating the cost-of-living crisis.
Despite inflation easing in June, it still surpassed expectations, dashing hopes that the fight against rising prices was gaining traction.
Influencing Factors on the Committee’s Decision
Analysts highlight a drop in inflation from the services sector, a critical component of the UK’s economy, which could play a significant role in the Monetary Policy Committee’s decision-making process.
Encouraging signs have also emerged from a decline in food price inflation.
Economists’ Perspectives on Future Rate Rises
Experts suggest that the bank may feel comfortable reverting to a quarter-point hike based on the latest data.
However, a half-point hike is not entirely ruled out, especially if the committee expects further rate increases in the future.
Economists from Dutch bank ING predict interest rates to peak at 5.5%, contingent on progress in services inflation and wages.
The possibility of a final quarter-point hike in November is also on the table, following the anticipated rate increase in September.
Conclusion
As the Bank of England prepares for its fourteenth consecutive interest rate hike, the decision is closely watched due to its potential impact on inflation and the overall economy.
The bank’s determination to control rising prices will likely shape its choice between a quarter-point or half-point rate increase.
Economists and market experts remain cautious but hopeful that these measures will eventually alleviate the cost-of-living crisis and stabilize inflationary pressures.