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Bank of England base rate set for biggest single hike since 1989

Nick Cheek
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Nick Cheek

The Bank of England (BoE) is set to action the biggest single hike to the base rate in 33 years on Thursday taking it to 3% and creating huge implications for the cost of mortgages.

In the face of soaring inflation in the UK, monetary policymakers are widely expected to action the steepest single increase to the base rate seen since 1989.

Markets are predicting a 90% chance of a hike by three quarters of a percentage point (75bps), taking the base rate from the current 2.25% to 3%. The last time the base rate was at 3% was in November 2008 before the financial crisis.

Martin Beck, chief economic advisor to the EY ITEM Club, said: “On balance, the EY ITEM Club expects the Monetary Policy Committee (MPC) to raise rates by 75bps this week – although a smaller 50bps increase wouldn’t be a surprise.

“That would be consistent both with recent comments from some MPC members that markets have been pricing too substantial a rise in the bank rate, and with divisions among the committee – while three members voted for 75bps in September, one voted for just 25bps.”

Economists at Goldman Sachs agree with this assessment. As quoted on CNBC, they said: “We see less pressure for the BoE to act aggressively, but we still believe that a step-up in the pace to 75 basis points is likely given that (1) fiscal policy is on net more expansionary than assumed at the August monetary policy report meeting; (2) news on the labour market and underlying inflation pressures has been firm; and (3) MPC commentary points to a robust policy response at the November meeting.”

‘Near instant increase to mortgage costs’

The Bank of England has raised rates at consecutive meetings since December 2021 when the base sat at just 0.1%.

A further increase to the base rate is likely to feed into mortgage costs, which have already risen substantially over the past year.

Anyone on a variable rate mortgage can expect to see a near instant increase to mortgage costs, while anyone coming off a fix in the coming months will be met with higher rates when remortgaging.

Even if the bumper hike on Thursday materialises, The BoE is expected to keep raising the base rate over the coming months taking it to at least 5% next year.

Inflation and growth forecasts to come

When setting the base rate tomorrow, monetary policymakers will also deliver their latest forecasts for inflation and economy growth which will give some insight on how 2023 may shape up.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: “Inflation may well now peak above 11% with scorching food prices in particular pushing up expectations.

“So, the Bank is still set to signal a further tightening of monetary policy, with financial markets now expecting that interest rates will reach around 5% next year before declining, as the impact of the recession, lower commodity prices and an easing off of supply chain snarl ups feed through.

“Dampening down demand now by raising rates and making borrowing more expensive is set to cause further financial pain for companies and consumers, but central banks clearly think it is the price to pay to reduce the risk of a prolonged period of stagflation.’’