Mortgage rates are expected to jump on Thursday in response to the largest increase in the Bank of England’s base rate since 1989, as the central bank tries to bring down an inflation rate expected to remain in double figures until at least next spring.
Marking the eighth consecutive interest rate rise, the Bank of England is expected to push the base interest rate up by 0.75 percentage points to 3% after what is likely to be a tense meeting of the monetary policy committee (MPC).
With economic figures showing that Europe and the US will be in recession next year, members of the MPC are expected to remain split over whether to restrict the rise to 0.5 percentage points, to prevent an even deeper downturn than already forecast.
The nine-strong MPC will come under pressure from rate hikes by the US Federal Reserve which on Wednesday hiked its rate by 0.75 percentage points and the ECB, which last week increased its main deposit rate by the same amount.
Last month, Bank governor Andrew Bailey said the economic situation had deteriorated since the MPC signalled a 0.5% rise in the summer.
He said: “As things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August.”
Homebuyers with tracker or variable rate mortgages will feel the pain of the rate rise immediately, while the estimated 300,000 people who must remortgage this month will find that two-year and five-year fixed rates remain at levels not seen since the 2008 financial crisis.
The average two-year fixed rate has fallen to 6.47% from 6.65% in mid-October – as the effects of the disastrous Kwasi Kwarteng mini-budget ease – but remains three times the rate offered by lenders earlier this year. A five-year fixed rate mortgage that could be bought for 6.51% on 20 October has slipped only marginally to 6.31%.
Investors expect the bank to continue its programme of raising rates into next year, despite Bailey stressing that each decision is made on its merits from one meeting to the next.
Until recently, the base rate was forecast to reach 5% before falling back in 2024.
MPC members Ben Broadbent, a deputy governor of the Bank, and Catherine Mann, who joined last year from a US investment bank, have argued that financial markets are overestimating how high rates will go.
In response to their interventions, markets have scaled back the peak rate to 4.75%.
Capital Economics, a consultancy, said the Fed and the ECB were poised to signal a slowdown in rate rises, but the UK’s weak financial position meant that the Bank of England would need to keep going.
However, many analysts said they expected the Bank would ease its rate rises next year in response to a tight government budget that cuts household spending power.
Analysts at Deutsche Bank have said they expect Threadneedle Street to opt for a 0.75 percentage point rise with a split vote.
Experts at the firm said they expect latest forecasts from the Bank of England, which will also be revealed on Thursday, to show that “the economic outlook has deteriorated further”.
They added: “Conditioned on market pricing, the UK economy will probably fall into a deeper and more prolonged recession.”
Chancellor Jeremy Hunt is understood to be considering steep tax rises to limit the government’s spending deficit when he announces his budget on 17 November.
Hunt and Rishi Sunak have argued they need to arrest a widening shortfall in government spending to reassure financial markets that proposals for tax cuts in the mini-budget in September was an aberration.
Economic conditions have worsened across most developed economies in response to the Russian invasion of Ukraine and a steep rise in energy costs.
UK factories reported a slump in orders in October that was likely to plunge the manufacturing industry into recession before the end of the year. Retailers and services firms have come under pressure from falling consumer and business confidence.
Rachel Reeves, labour’s shadow chancellor, said “Britain’s unique exposure to economic shocks has been down to a failure to get to grips with more than a decade of weak growth, low productivity and underinvestment and widening inequality.
“Rising interest rates will mean families with already stretched budgets will be hit by higher mortgage payments.
“It will mean higher financing costs for businesses.
“For many firms who have had a tough couple of years this will mean desperately difficult decisions about whether to carry on.”