An interest rate hike by the Bank of England at midday is a firm certainty – although opinions are divided on the level of additional pain that could be imposed as efforts to curb the country’s inflation problem fail.
Early this week, policymakers were widely tipped to raise the base rate by a quarter of a percentage point to 4.75% – a record 13th consecutive increase – maintaining a slower trajectory for hikes since March.
But the latest inflation figuresreleased yesterday, prompted financial market participants to price in a greater, almost equal, probability of a half-percentage-point rise to 5%.
While we were already worried about the sustained pace of price increases, the inflation the data was a shock.
It showed that price growth was becoming increasingly entrenched in the economy, while the main consumer price index (CPI) also failed to decline as most experts had predicted.
The Bank had also previously expressed concerns about the pace of wage increases which it said is contributing to demand and further inflation.
Inflation is proving harder to cool than expected, and Chancellor Jeremy Hunt told Sky News last month that he would even comfortable with a recession if it reduced inflation.
The only tool the Bank has to do this, rate hikes, will mean more pain for borrowers regardless of today’s rate decision.
Read more: Prime Minister and Chancellor face a conundrum as mortgages rise – and there’s no silver bullet to end the crisis
Rising interest rate expectations in recent weeks have led to higher funding costs for lenders, data from Moneyfacts this week shows average two-year fixed mortgage rates exceed 6%.
They have continued to rise daily this week after holding just above 2.5% in March last year.
With financial markets now seeing the Bank Rate potentially rising to 6% by the start of next year, such a level, if reached, would mean that mortgage rates would still have to rise a lot further.
Learn more:
The solution to lowering inflation is a political nightmare for the Conservatives
Mortgage misery: What’s causing the crisis, will it get worse, and what can you do if you run into trouble?
‘Eyewatering’ reaches 1.4m mortgage customers, mostly young people, warns IFS
In making its decision on rates today, the Monetary Policy Committee could face a big split in the vote – although the majority of commentators are of the view that a quarter-point hike will be the result.
After all, the Bank has consistently steered markets away from their peak rate scenarios this year and even signaled that a break in the rate cycle is near.
But the main function of the MPC is to keep inflation around a target rate of 2% – and there are signs of frustration in Whitehall that the independent Bank of England is lagging the curve.
So at 8.7% – and with wage growth and so-called core inflation (which excludes volatile items such as energy and food) rising in the past month – some could be forgiven for thinking that there was every justification for a 0.5 percentage point hike rate.
Please use Chrome browser for more accessible video player
Sticky Inflation Explained
The other side of the argument suggests that a smaller hike would be sufficient as there is evidence that the 12 rate hikes to date, along with a natural easing of many costs, were starting to have an effect.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said broader data suggested wage growth pressures would start to ease and energy-related inflation would fall sharply, allowing a slowdown. broader price growth.
He said of the MPC’s dilemma: “The headline CPI inflation rate is expected to fall sharply further over the remainder of this year, likely to around 4.5% by December and around 2% by December. second half of 2024.”
He added: “We continue to believe that the MPC will not raise the discount rate to the level of nearly 6% set by the markets ahead of today’s data; for now, our scenario remains the discount rate at 5%.”