Bank of England Faces Critical Interest Rate Hike in Battle Against Inflation

The Bank of England is once again in the spotlight as it prepares for its fourteenth consecutive interest rate hike.

With inflation surging, policymakers are expected to vote through the rate increase, marking one of the final rounds in the central bank’s long fight against rising prices.

Rising Interest Rates and Its Impact:

The impending hike would take the cost of borrowing above 5%, reaching its highest level since the 2008 financial crisis.

For borrowers with variable-rate mortgages, this increase would raise their monthly repayments.

Additionally, new home loans offered to first-time buyers and those re-mortgaging from fixed-rate deals would also face higher interest rates.

Uncertainty Surrounding the Magnitude of the Hike:

City forecasters have differing opinions on the potential size of the upcoming interest rate hike.

Some anticipate a quarter-point rise, bringing rates to 5.25%, while others predict a half-point hike to 5.50%.

The Monetary Policy Committee opted for a half-point increase in their previous meeting, indicating their commitment to combating inflation, which, although slightly eased, remains well above the BOE’s 2% target.

Factors Influencing the Decision:

The surge in energy and fuel prices following Russia’s invasion of Ukraine played a significant role in driving inflation upwards, creating a cost-of-living crisis.

The recent decrease in inflation from the services sector, the dominant part of the UK’s economy, and drops in food price inflation are potential factors that may influence the Monetary Policy Committee’s decision in this week’s meeting.

Expectations for Future Interest Rate Rises:

While there was hope that the fight against rising prices was gaining momentum after June’s inflation reading came in lower than expected, economists believe that the interest rate hike cycle may be nearing its end.

As the Bank of England is likely to raise rates again, the magnitude of future hikes may depend on further progress in services inflation and wages.

ING, for instance, predicts that interest rates will peak at 5.5%, with the possibility of a final quarter-point hike in November following the one expected for September.