Fresh blow for families as Bank of England eyes bumper rate hike

The Bank of England is set to pile more misery on homeowners this week with yet another hike in borrowing costs, which would be its 13th such move in a row.

Traders think there is a chance that Governor Andrew Bailey may even fire a ‘big bazooka’ and announce a half-percentage point rise in a desperate bid to tame persistent inflation.

That would take the base rate to 5 per cent – its highest level since just before the financial crisis 15 years ago.

It would mean someone on a 25-year base-rate tracker mortgage of £200,000 would pay an extra £60 a month, according to data group Moneyfacts. Bailey is under fire for not acting sooner to control rising prices – and for ignoring warnings from his own chief economist Andy Haldane as the economy emerged from the pandemic.

‘The 1970s and 1980s demonstrate that, once out of the bottle, the inflation genie 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 interest rate rises.

The Bank, whose goal is to hit an inflation target of 2 per cent, only started to raise rates at the end of that year.

Experts say it has been playing catch-up ever since as energy prices soared in the wake of Russia’s invasion of Ukraine.

There are now growing fears that inflation has become ’embedded’, with rising prices leading to higher wage demands that push up costs for business, which are then passed on to customers.

The Consumer Price Index (CPI) has peaked, but core inflation, which excludes volatile food and energy prices, is still rising at 6.8 per cent a year – a level last seen in 1992

Expectations of higher-for-longer interest rates soared last week after figures showed wages were rising faster than forecast. That provoked mortgage lenders to rush to hike the interest rate 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 per cent.

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 review of its economic forecasting after repeatedly getting its inflation outlook wrong.

The last time the Bank approved a half-percentage point rise was in February, but that failed to nip the cost-of-living crisis in the bud.

Sandra Horsfield, economist at investment bank Investec, said such a move would be ‘aggressive’ and there was ‘little sign the medicine was taking effect’ in taming the inflationary wage-price spiral.

Fears that the Bank has lost its grip on inflation caused the cost of Government borrowing to soar last week to even higher than the Liz Truss-era levels of last autumn, when her mini-Budget of unfunded tax cuts spooked investors and caused a run on the pound.

Experts say the difference this time is that sterling has strengthened as traders anticipate higher interest rates, meaning bigger returns for holding the currency.