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Bank of England Set For 13-year high Interest Rate Hike

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Historic tightening would trigger a review on asset sales

The Bank of England this week is expected to raise interest rates to their highest level in 13 years and clarify how it plans sell off some of its 847 billion pounds ($1.1 trillion) in government bond holdings. The move would take the U.K. central bank into unchartered territory, since none of its major-economy peers have yet sold government bonds accumulated under quantitative easing since 2008

Policy makers led by Governor Andrew Bailey have to balance efforts to contain inflation that has leaped to a 30-year high against the risk that raising rates will slow the recovery. Markets, investors and economists expect the nine-member monetary policy committee to vote on Thursday for a quarter point hike in the benchmark lending rate to 1%. That would be the fourth increase in a row and match the level in February 2009, when the BOE was aggressively cutting borrowing costs in the financial crisis.

In March, eight MPC members voted for a quarter-point hike. One member, deputy governor Jon Cunliffe, voted to hold rates at 0.75%. Investors are betting rates will rise above 2% before the end of this year.

 

Source – Bloomberg

Will interest rates keep going up?

” We may need to increase interest rates further in the coming months. But that all depends on what happens in the economy. In particular, we will be watching closely what is likely to happen to the rate of inflation in the next year or two. 

We review how the economy is doing and whether a change in interest rates is needed eight times a year (roughly every six weeks). ” – Statement made by BOE

The BoE’s monetary policy committee (MPC) meets on Thursday and is expected to increase interest rates by 0.25%, taking the central bank’s base rate to 1% – its highest level since early 2009. Inflation in March peaked at 7% – its highest level for 30 years.

The impact of the war in Ukraine has an impact on petrol prices and the cost of everyday items. The economic uncertainty it creates is also making the Bank of England’s decisions on rates trickier.

The idea of raising interest rates is to keep those current and predicted price rises, measured by the rate of inflation, under control. In the face of global upheaval, this may be a relatively blunt tool. All eyes will be on the Bank’s long-term strategy.

Higher interest rates make borrowing more expensive. For households, that could mean higher mortgage costs, although – for the vast majority of homeowners – the impact is not immediate, and some will escape it entirely.

An improvement on savings rates is likely to be far outweighed by the falling value of money put away.

Homeowner impact

Recent years have seen an extraordinary period of cheap mortgages but, even before the Bank of England’s rate-setting Monetary Policy Committee began increasing interest rates in December, there were signs that the era of ultra-low mortgage rates was at an end. Some lenders have raised rates for those applying for a new home loan. However, brokers have predicted any rises in mortgage rates to be “slow and measured”, which would mean mortgages would stay cheap by historical standards for some time.

Some 74% of mortgage borrowers in the UK are on fixed-rate deals, so would only see a change in their repayments when their current term ends, according to banking trade body UK Finance. About 1.5 million fixed-rate deals will expire this year, and another 1.5 million will do so in 2023.

 

Of the remainder, 850,000 homeowners are on tracker deals, and the other 1.1 million are on standard variable rates (SVRs). They are the people likely to feel an immediate impact now the Bank rate has risen.

The increase in the Bank rate to 0.75% means a typical tracker mortgage customer’s monthly repayment will go up by £25.76. The typical SVR customer is likely to pay £15.96 more a month, UK Finance figures show. This is on top of similar rises in previous months.

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