UK interest rate rise predicted as cost of living crisis deepens

Bank of England to vote on potential rate change while inflation soars to 30-year high

Britons are braced for the Bank of England to increase interest rates on Thursday as the central bank seeks to tackle price pressures that have pushed annual inflation to a 30-year high of 5.4%.

Most City economists said the majority of members on the Bank’s rate-setting committee would increase the base rate from 0.25% to 0.5%, with the likelihood that at least two more increases would follow during 2022.

On the eve of the Bank’s decision, 29 economists from 45 respondents to a survey by Reuters predicted that the monetary policy committee (MPC) would go ahead with a rise, while 16 forecast that rates were likely to remain on hold.

High-street lenders are expected to increase the cost of variable-rate mortgages immediately after the vote, adding to the cost of living crisis facing many of those borrowing to buy a home. Rents are also likely to increase as landlords pass on the cost of borrowing to tenants, though savers will enjoy a long-awaited rise in the interest paid on deposit accounts.

A separate survey by the data compiler IHS Markit found that 49% of households – a record high – believe that Threadneedle Street policymakers will impose at least one rate rise in the next three months.

IHS Markit said it was clear that the MPC’s surprise vote in December to increase the base rate from 0.1% to 0.25%, and to signal three rate rises to 1% this year, had filtered through to the public.

Chris Williamson, the chief business economist at IHS Markit, said: “UK households have grown increasingly certain of the Bank of England hiking interest rates for a second meeting in succession, with expectations of tighter policy having spiked higher since last October as inflation worries took hold.”

He said recent surveys of business activity had shown the economy was “displaying encouraging resilience in the face of the Omicron [coronavirus] wave”, while employment agencies had reported that wage growth rose sharply as employers competed to attract staff amid widespread labour shortages.

“With the Omicron wave already ebbing and virus containment measures eased, there’s a good chance that the pace of economic growth will accelerate in coming months, which will likely add to speculation that further rate hikes are on the table as we head into spring,” said Williamson.

Pressure on the Bank has grown after a surge in the price of energy, secondhand cars, food and household goods that pushed the consumer prices index (CPI) to 5.4% in December and the retail prices index (RPI), which is used for wage bargaining, to 7%.

The Bank aims to keep inflation at 2% over a two- to three-year period.

High demand for goods during a succession of lockdowns, combined with shortages caused by Covid-related delays made worse by hold-ups at UK ports due to Brexit, has pushed up prices.

Grocery prices rose 3.8% over the four weeks to 23 January compared with the same period last year, according to the market research company Kantar. It said prices were rising fastest for fresh beef and poultry, savoury snacks, crisps, skincare and cat food, offset by falls in the price of fresh bacon, vitamins and beer.

Industry figures showed that a broader measure of shop price inflation almost doubled in January to the highest level for nearly a decade, pushed up by the spiralling cost of furniture and flooring.

Annual inflation of goods bought from retailers rose to 1.5% last month from 0.8% in December, according to the latest data from the British Retail Consortium trade body and the market research company NielsenIQ, which is the highest level since December 2012.

The energy regulator is expected to increase the price cap on gas and electricity by more than 50% to reach almost £2,000 a year on Thursday, up from an average of £1,277 this winter, to reflect record high gas prices caused by a global crisis in supply.

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