Money markets are anticipating that the Bank of England (BoE) will increase the base rate to 1.75% this week with the biggest interest rate rise in a quarter of a century.
The central bank has been gradually raising rates as it tries to combat rising inflation due to the ongoing war in Ukraine and spiralling energy prices and markets now expect a 0.5% increase.
Previous increases have seen mortgage lenders move to raise rates with products often pulled with little notice – much to the ire of brokers.
And with the BoE’s Monetary Policy Committee (MPC) due to meet this week to come to a decision over whether the base rate will be increased once again it looks certain that more changes are on the cards.
The bank itself has previously suggested that a 0.5% rise to 1.75% could be on the cards with rates already at a 13-year high of 1.25%.
The decision will follow news over recent weeks that inflation hit a 40-year high of 9.4%, exacerbating the continuing cost of living crisis.
However, the economy made an unexpected return to growth in May after two months of contraction.
But despite wages growth of 6.2% in the three months to May, the disparity between price rises and inflation remains stark.
James Smith, developed markets economist at ING, said: “Policymakers hinted back in June that they could act ‘forcefully’ to get inflation lower. And with a 0.50% move more or less priced, that’s what we expect them to do.
But he added that future increases may not be as large as anticipated: “Markets have already pared back expectations for ‘peak’ Bank rate from 3.5% to 2.9%, though that still implies two further 0.50% hikes by December, plus a little more thereafter.”
The BoE will announce its decision on Thursday at 12pm.
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