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The Bank of England (BoE) has raised the base rate to 5.25 per cent, the highest level seen since 2008 and the hike will pile more pressure onto borrowers who are already facing huge price rises amid the cost of living crisis.

But the question everyone is asking now is when will they start falling?

Markets have started to price in a lower peak for borrowing costs after the Bank of England signalled that the cycle of interest rate increases could be nearing an end.

Despite the 14th consecutive rate rise since late 2021, traders seized on signs that the top of the rate cycle may be closer than previously expected. Markets are now pricing in a peak of about 5.75 per cent, having previously bet on rates rising above 6 per cent.

It came as the Bank signalled that rates will need to stay higher for longer to push inflation, which stood at 7.9 per cent in June, towards the Bank’s target of 2 per cent.

In a closely-watched change of wording, the Bank’s monetary policy committee said it would ensure that the base rate “is sufficiently restrictive for sufficiently long to return inflation to the 2 per cent target sustainably in the medium term”, suggesting that borrowing costs could remain above 5 per cent into 2025.

Andrew Bailey, governor of the Bank of England, said that “in order to get inflation back to target we are going to have to, in a sense, keep this stance of policy”. Bailey also signalled that the peak for borrowing costs may not be far off. The governor emphasised that “there is more than one path from here that delivers us back to the target”.

This could include the base rate remaining at 5.25 per cent.

The monetary policy committee was split three ways over what to do with borrowing costs this month. Six members, including Bailey, voted for a 0.25 percentage point rise while two members, Jonathan Haskel and Catherine Mann, were in favour of a bigger 0.5 percentage point increase. Swati Dhingra voted for the rate to be kept at 5 per cent.

Bailey is under significant pressure to bring down inflation, which hit a 41-year high of 11.1 per cent in October. While inflation has remained stubbornly high so far this year, a bigger than expected fall in June has raised hopes that the cycle of rate rises is having an effect. Bailey said: “The stance of monetary policy is restrictive, in our view. The evidence is now clear that it is having an impact.”

Economists at Nomura said the Bank’s description of its policy as “restrictive” suggested “on one interpretation at least, that we are approaching the end of the hiking cycle”.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, also said that although further rate rises were likely, “the peak level” for the base rate “is near”.

Source: Ben Martin, The Times (Friday August 04 2023)

Bank warns of ‘more frequent’ rate increases than expected

By Ben Morris, Business reporter, BBC News

2 May 2019

Interest rate increases could be “more frequent” than expected if the economy performs as the Bank of England is expecting, governor Mark Carney says.

The markets are forecasting just one interest rate increase by 2021.

But if there is a resolution to the Brexit impasse, and inflation and growth continue to pick-up, then more increases are likely, Mr Carney said.

As expected, the Bank kept interest rates on hold at 0.75% at its latest policy meeting.

Interest rates have been at that level since last August, when the Bank raised them by a quarter of a percentage point.

The Bank is expecting growth and inflation to pick up over the next two years.

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In a news conference, Mr Carney said: “If something broadly like this forecast comes to pass… it will require interest rate increases over that period and it will require more, and more frequent interest rate increases, than the market currently expects.”

The Bank’s forecasts are based on a “smooth adjustment” to any new trading relationship with the European Union.

What did the Bank say about the economy?

In its Quarterly Inflation Report, the Bank of England raised its UK growth forecast for this year, in part because the outlook for the global economy is a bit brighter.

The Bank now sees growth of 1.5% this year, up from February’s forecast of 1.2%.

Economic growth has been subdued since the UK voted in June 2016 to leave the EU.

In particular, business investment has been falling.

The Bank says stockpiling has been giving the economy a short-term boost, but for this year, the strengthening of the global economy will have a more important effect.

In the minutes from its latest policy meeting, the Bank said “global growth had shown signs of stabilisation, and had been a little better than expected”.

It also forecasts the unemployment rate will continue falling in the coming years to 3.5% by 2022, which would be the lowest rate since 1973.

Will the Bank raise interest rates soon?

Analysis by Dharshini David Economics Correspondent

The Bank is reluctant to move interest rates until there is further clarity, not least about the path of Brexit.

For as it highlights (again), the movement in rates then could be “in either direction”, depending on the outcome, the impact on the economy and whether it decides to support growth or inflation.

If all goes smoothly, then the Bank is likely to turn its firepower on inflation and proceed with raising rates “at a gradual pace and to a limited extent” – especially if there’s a bounce in investment and hiring.

At the moment, the MPC reckons “the cost of waiting for further information is relatively low”.

But that, given the degree of inflationary pressure it’s forecasting, is quite a gamble.

If the Bank has missed the boat, then rates might have to ultimately rise faster and by more than originally envisaged to curb inflation.

That would be an unenviable parting gift from Mr Carney to his successor.

What does it mean for mortgages?

Moves in interest rates are important to the 3.5 million people with variable or tracker mortgages.

Even a small quarter-point rise can add hundreds of pounds to their annual mortgage costs.

Mortgage market experts say that for those who can afford to buy a home, now is a good time to borrow.

“Right now, you’ve got lenders that want your business and rates are exceptionally low,” said David Hollingworth, from L&C Mortgages.

Some lenders are offering five-year fixed deals at below 2%, he said.

Even borrowers with a small deposit can find competitive rates of interest, he added.

What is the outlook for the housing market?

The Bank expects a fall in UK house prices this year, with property values predicted to drop by 1.25%.

It says some households are likely to have delayed moving house because of Brexit uncertainty.

It also says that affordability is also slowing the market, particularly in areas where prices are high, such as London and the South East.

When will Mark Carney step down?

Last month, the government launched the recruitment process for a new governor for the Bank of England.

Mark Carney will step down on 31 January 2020 after more than six years in the post.

Interviews will be held over the summer and the appointment will be made by the government in the autumn.

The government is under pressure to consider female candidates, as men hold the Bank’s key positions.

At the moment, the Monetary Policy Committee, which sets interest rates, only has one female among its nine members.

When asked about the lack of diversity at the Bank, Mr Carney said “big progress” had been made with women now making up 31% of senior management.D