A 0.75% increase, the latest in a string of eight rate hikes since last year, would not be enough to guarantee victory in the war against double-digit inflation, the Bank said, as it warned that further action would be needed. The UK economy faces a “very challenging outlook”, with a recession that started this summer and is now expected to last until mid-2024. With a general election likely in 2024, the Conservatives face a campaign to stay in government at the end of a prolonged recession, in which the Bank said it expected unemployment to rise from 3.5% to 6.5%. But there was some relief for mortgage holders as the central bank downgraded City expectations of a sharp rise in borrowing costs to above 5%, arguing that the prospect of a two-year recession meant a much less aggressive stance was likely to be needed. Andrew Bailey, governor of the Bank, said: “We cannot make promises about future rates, but based on where we are today, we believe Bank Rate should rise by less than what is currently being priced into the financial markets.” . Bank of England interest rates are rising Bailey and his officials expect inflation to drop to zero by 2025, and analysts at Berenberg Bank predict just one more rate hike, to 3.5 percent. Bailey said higher borrowing costs have already affected households. “These are big changes and they have a real impact on people’s lives,” he told a news conference after the release of the Bank’s quarterly monetary policy report. Homebuyers with tracker or variable rate mortgages will feel the pain of the rate hike immediately, while the estimated 300,000 people due to remortgage this month will find two- and five-year fixed rates remain at unprecedented levels since the financial crisis of 2008. The Bank said the cost of fixed-rate mortgages had already fallen from levels seen at the height of the panic in the wake of Kwasi Kwarteng’s ill-fated mini-budget, which saw them soar above 6%. Bank of England raises rates to 3% in biggest single move in 30 years – video Hinting at the Bank’s concern about the fragility of the housing market, Bailey said he hoped mortgage providers would respond by continuing to reduce the cost of their products to homebuyers. Bailey said he recognized the pain caused by tighter interest rate policy, but added: “If we don’t act forcefully now, it will be worse later.” The Bank now expects inflation, which reached 10.1% in September, to peak at 11% by the end of 2022 and then fall “probably quite sharply” from mid-2023. He blamed higher energy prices and a tight labor market for the big hike, which was met with aggressive hikes in the last week by the U.S. Federal Reserve and the European Central Bank. Subscribe to Business Today Get ready for the business day – we’ll point you to all the business news and analysis you need every morning Privacy Notice: Newsletters may contain information about charities, online advertising and content sponsored by external parties. For more information, see our Privacy Policy. We use Google reCaptcha to protect our website and Google’s Privacy Policy and Terms of Service apply. The last time UK interest rates rose by more than 0.5% was in 1989. John Major’s government forced a 2% rise during the 1992 exchange rate mechanism crisis, albeit for less than 24 hours before abolished. The vote to raise rates was split 7-2 between the nine-member monetary policy committee (MPC) after Silvana Tenreyro voted for a 0.25% hike and Swati Dhingra for a 0.5% increase. Both are professors at the London School of Economics. They argued that the full effects of eight consecutive hikes should be allowed to seep into the wider economy before tougher measures are taken. Chancellor Jeremy Hunt said: “Inflation is the enemy and it is taking a heavy toll on families, pensioners and businesses across the country. That is why this government’s No. 1 priority is to contain inflation and today the Bank has taken action in line with its goal of bringing inflation back to target.” Rachel Reeves, the shadow chancellor, said: “Families now face higher mortgages and more stress after months of financial chaos. “Workers are paying the price for the Tories’ failure. Britain deserves more than this.” Under alternative assumptions that interest rates remained unchanged at 3%, the economy would still contract until the end of 2023, but the cumulative decline in output would be 1.7% instead of 2.9%, and unemployment would peak just over 5%. The Bank said it had not considered any action by Hunt in its autumn statement on November 17, although the chancellor is expected to announce a package of tax rises and spending cuts of up to £50bn. Kallum Pickering, UK analyst at Berenberg, said: “While much will depend on the upcoming [budget] announcement, today’s policy decision and guidance support our call for the Bank to raise Bank Rate once again by 0.5 basis points in December to a maximum of 3.5%. “After that, we expect the Bank to remain on hold in the first half of 2023 before cutting Bank Rate modestly, by around 0.5 basis points, in the second half of 2023.” Risks to this call are leaning slightly towards another 0.25 point hike in February.”
