Borrowing costs

Bank of England to raise borrowing costs

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a City expects the nine-member Bank of England Monetary Policy Committee (MPC) to hike rates from 0.25% to 0.5% on Thursday, the first consecutive interest rate hike since 2004.

It raised rates in December by 0.1% in a more controversial move. The Bank said at the time that it could no longer ignore inflation, which it had so far tried to portray as a passing problem.

Inflation has continued unabated since then, leading to the belief in the city that the Bank will have to act again.

How high could rates go up?

Maybe 1.5% by spring, so three more increases after tomorrow.

The Bank hopes this will bring inflation closer to its 2% target.

Consumer price index (CPI) inflation already hit a nearly 30-year high of 5.4% in December and painful energy price hikes are expected to push it past 6 % this spring.

Experts predict Ofgem’s energy price cap review also on Thursday will reveal a 49% increase, pushing the average annual household bill to around £1,900.

The question for skeptics is whether a rate increase will actually do anything to reduce the cost of goods or services or necessities like heating.

Laith Khalaf, head of investment analysis at AJ Bell, said: “The Bank of England cannot control the major factors that will drive up inflation in the immediate future, such as global energy prices. or high shipping costs.

“But a rate hike in February would help persuade the market that the Bank is really serious and help stave off embedded inflationary expectations that could trigger a dreaded wage-price spiral.”

Isn’t the Bank concerned that Covid will continue to hit the economy?

Martin Beck, EY Item Club chief economic adviser, said: “The Omicron variant has almost certainly weakened the economy due to greater consumer hesitancy and an increase in the number of isolated people.

“But the fact that the MPC raised the discount rate in December still indicates that the committee gave less weight to the virus. And recent developments are likely to reinforce this position.

The hit to growth has likely been “more modest” than initially feared, he added, while recent official figures have confirmed that Britain’s labor market is still firing on all cylinders with little impact since the end of the leave.

What else could the Bank do?

At some point it will have to start unwinding its £895bn quantitative easing package. This saw him buy bonds from banks and pension funds in a bid to flood the economy with cash. He will probably start reselling these bonds soon.

The Bank has already said it will consider so-called quantitative tightening when rates hit 0.5%, meaning the Bank could make the announcement alongside Thursday’s decision. Other central banks could follow suit.

What will happen to the housing market?

Most mortgage holders are on fixed rate products, which means tomorrow’s changes won’t have an immediate effect. However, they will find borrowing more expensive when canceling fixed agreements and mortgages.

Cory Askew, Head of Sales at Chestertons, said: “We don’t expect the 0.25% increase to have a major impact on current buyer behavior; especially since mortgage lenders have already begun to incorporate the change in the base rate into future calculations.

“The property market, particularly in London, continues to see record levels of house hunters, eager to find a new property to move into. Compared to January of last year, our branches saw an incredible 63% increase in buyer inquiries. »