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Bank of England predicted to raise rates to 3.5%

Rebecca Goodman
Written By:
Rebecca Goodman
Posted:
Updated:
09/12/2022

The Bank of England (BoE) is expected to raise interest rates next week to 3.5% in a bid to fight soaring inflation.

This is likely to mean higher costs for mortgages and potentially higher interest rates for savers.

At the last meeting on 2 November, the Monetary Policy Committee (MPC) agreed by a majority of seven to two to increase the rate by 0.75% to 3%.

Banking experts have predicted at next week’s meeting on Thursday the rate will be hiked by 0.50% to 3.5%.

BoE rate predicted to peak in second quarter of 2023

Financial markets are currently pricing in a 78% chance that rates will rise to 3.5%.

A survey of 54 economists by Reuters found that the majority expect a 0.50% rise. Only two said they expected a 0.75% increase next week compared to 13 of 56 asked in November.

It’s predicted that after next week, the BoE will add another 0.50% in the first quarter of 2023 and 0.25% in the second. The rate will then peak at 4.25%.

The BoE has repeatedly hinted that it will continue to raise rates in response to high inflation, which is currently at 11.1%, far beyond the government’s target of 2%.

A rise of 0.50% is also predicted by the ratings agency, Fitch, and it says it will rise by a further 1.25% to a peak of 4.75% by the second quarter of 2023.

This is much higher than the 3% peak which was predicted in September and it says the higher rate partly reflects the extreme volatility seen in UK financial markets in late September and early October.

“Not out of the woods yet”

Experts at Deutsche Bank are also predicting a rise of 0.50% to 3.5%. They say good news around softening inflation expectations and easing recruitment difficulties mean the BoE won’t raise rates by the higher level of 0.75%.

Sanjay Raja, senior economist for the bank, said: “The Bank isn’t out of the woods just yet. Persistent inflationary pressures alongside lingering labour market tightness should result in another ‘forceful’ hike.”

It is predicting the BoE will continue raising the rate until it reaches 4.5% by May next year.

“Inflation fears trump recession dread”

Sarah Coles, senior personal finance analyst for Hargreaves Lansdown, said: “Inflation fears are expected to trump recession dread at the Bank of England next week. The market expects interest rates to rise again – this time up 0.5 percentage points to 3.5%.

“It’s going to make life more difficult if your borrowing is linked to the base rate, but the impact on fixed rate mortgages and savings is more complicated. We may well see the weird phenomenon of base rates going up while savings and mortgage rates drop.”

Variable mortgage holders to see immediate impact

Anyone with a tracker or standard variable rate (SVR) mortgage will see an immediate hike to the price they pay each month.

The current rate for an SVR is 6.4%, according to Moneyfacts, and if the full rate is passed on this will rise to 7% on average.

Coles says for those on fixed-rate mortgages, it’s likely the 0.5% rise has already been priced into the market.

She said: “The market is being driven by rate expectations further down the track, which have fallen dramatically since the surge that was powered by the mini-budget. As a result, the market now expects the base rate to peak at somewhere around 4.5% or 4.75%, before falling back as the recession takes hold.

“It means it doesn’t need to price fixed rates so high. Mortgage rates could fall further from here, but it’s not guaranteed, and there’s no clear picture of how long any more falls will take.”