Bank of England wanted to add further misery to homeowners with another rise in borrowing costs in what would be the 13th such move in a row
The Bank of England is set to wreak more havoc on homeowners this week with another rise in borrowing costs in what would be the 13th such move in a row.
Traders think there is a chance that Governor Andrew Bailey will even fire a “big bazooka” announcing a half percentage point increase in a desperate bid to contain ongoing inflation.
That would bring the base rate to 5 percent – the highest level since just before the financial crisis 15 years ago.
It would mean someone with a £200,000 25-year tracker mortgage would pay an extra £60 per month, according to data group Moneyfacts. Bailey is under fire for not taking action sooner to contain rising prices – and for ignoring warnings from his own chief economist Andy Haldane as the economy emerged from the pandemic.
“The 1970s and 1980s show that the inflation genie, once out of the bottle, is notoriously difficult to get back in,” Haldane wrote in the Daily Mail in May 2021, after being overruled by Bailey on the need for rate hikes.
Bad Luck 13: Governor Andrew Bailey tries to curb inflation
The Bank, whose goal is to meet a 2 percent inflation target, only started raising rates at the end of that year.
Experts say it has since caught up as energy prices soared in the wake of Russia’s invasion of Ukraine.
There are now mounting fears that inflation has become ’embedded’, with rising prices leading to higher wage demands driving up costs for businesses, which are then passed on to customers.
The consumer price index (CPI) has peaked, but core inflation, excluding volatile food and energy prices, is still rising at 6.8 percent a year – a level last seen in 1992
Expectations of longer-term higher interest rates surged last week after data showed wages rising faster than expected. That prompted mortgage lenders to rush to raise interest rates on home loans, while Bailey admitted it would take “a lot longer than we expected” for headline inflation to fall from its current 7.8 percent.
Chancellor Jeremy Hunt also warned households that there was ‘no alternative’ to further interest rate pain as HSBC pulled its mortgages from sale for the second time in a week. The Bank of England has ordered a revision of its economic forecasts after repeatedly misjudging its inflation outlook.
The last time the Bank approved a half percentage point increase was in February, but that failed to nip the cost of living crisis in the bud.
Sandra Horsfield, an economist at investment bank Investec, said such a move would be “aggressive” and that there was “few signs the drug was having an effect” in taming the inflationary wage-price spiral.
Fears that the Bank has lost its grip on inflation sent government borrowing costs soaring last week to even exceed Liz Truss-era levels last fall, when its mini-budget of unsecured tax cuts drove investors scare and a run on the pound.
Experts say the difference this time around is that the pound has strengthened as traders anticipate higher interest rates, meaning higher returns for holding the currency.