Among central banks the Bank of England was one of the first to fire the starting gun on rate hikes when it raised the base rate to 0.25 percent in December last year following months of speculation. Anticipation is now building for a further increase when the Bank’s Monetary Policy Committee (MPC) meets this Thursday. According to Hargreaves Lansdown markets are already thought to be pricing in rate hikes across the year with an expectation of the base rate reaching one percent by the summer and 1.25 percent by the end of 2022. Adrian Kidd, chartered wealth manager at EQ Financial Planning, predicted: “The Bank of England should raise rates and it will.
“Central banks have been slow off the mark due to Covid but some upward motion to rates is long overdue.”
Graham Cox, founder of Self-Employed Mortgage Hub, commented: “Higher interest rates are long overdue in my opinion.
“The Bank of England must prevent runaway inflation at all costs”
Inflation in the UK has now reached 5.4 percent, far beyond the Bank’s two percent target.
While inflation has been rising throughout the second half of last year the Bank has exercised caution over hiking rates over fears for the strength of the economy, and particularly the jobs market, as the UK emerges from the pandemic.
Data in recent weeks on falling unemployment and soaring numbers on payroll has now put to bed any fears though, leaving inflation as the big concern.
Ross Boyd, CEO of mortgage switching platform Dashly, said the Bank now had “no choice but to raise rates this week.”
He added if the Bank didn’t get a grip on inflation “the entire UK economy could unravel.”
While the Bank is under pressure to act on the soaring cost of living though, rate hikes spell bad news for borrowers- particularly those on tracker mortgages or looking to take out a new mortgage.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, warned: “The idea behind rate rises is to ease inflation and alleviate the cost-of-living crisis, but for anyone facing a horrible combination of higher mortgage payments and rising taxes, it could do the precise opposite.”
After December’s rate hike a number of banks began announcing increases in their tracker rates inline with the 0.15 percent increase to the base rate.
For anyone re-mortgaging this year the new rates on offer could also prove a shock if they’d previously fixed at a lower rate.
If someone currently paying one percent on a £200,000 mortgage over 25 years re-mortgaged to a two percent deal for example their monthly costs could rise by £94.
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While savers may be hoping to benefit from higher interest rates Ms Coles warned there was “no guarantee” these would be past on to savings accounts.
She explained: “The last (rate hike) didn’t persuade the high street giants to budge an inch on easy access accounts.
“We’ve seen some sluggish movement on other accounts – and a few higher rates will kick in from 1 February – but only a tiny fragment of the market has passed on rate rises in full.”
How effectively any rate hikes will bring down inflation remains to be seen with the measures usually having a significant lag time and warnings a number of the causes of inflation, such as runaway energy prices, remain beyond the Bank’s control.
Stuart Powell, managing director of Ocean Mortgages, summarised the Bank as being in a “near impossible position” with any decision likely to cause “economic pain.”
He added: “Financially, 2022 will prove to be the worst year ever for millions.”