Bank of England poised to raise interest rates for 13th time despite mortgage timebomb – business live

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UK fixed-rate mortgages have grown even more expensive, the latest data from Moneyfacts shows, as lenders anticipate rising interest rates.

The average 2-year fixed residential mortgage rate has risen to 6.19%, up from 6.15% on Wednesday. At the start of May, the figure was 5.26%, before concerns over UK inflation started driving up borrowing costs.

The average 5-year fixed residential mortgage rate has nudged higher too, to 5.82% from 5.79% on Wednesday.

A few more mortgage products are available today, after lenders cut their options over the last week or so.

There are currently 4,507 residential mortgage products available. This is up from a total of 4,498 on the previous working day, Moneyfacts reports.

Today’s newspapers do not make pleasant reading for the Bank of England, as it attracts heavy criticism for failing to keep inflation at its 2% target.

Ex-business secretary Jacob Rees-Mogg accused the Bank’s governor, Andrew Bailey, of “burying his head in the sand”.

He told the Sun:

“Having been too slow at the start, they now risk an overreaction that risks damaging economic consequences.

“But it’s extraordinary arrogance for the Bank to blame everything but its own monetary policy.”

The Sun have also dubbed Bailey the “Plank of England”, and mocked up a wooden effigy of the governor; they say homeowners will pay a crippling price for his failure to control inflation.

The Daily Mail reports that senior Tories and economists turned on the Bank of England last night, as it prepared to heap more misery on homeowners today with another rate rise.

Andrea Leadsom, a former Conservative Treasury minister, accused the Bank of doing “too little, too late” to rein in surging prices.

Leadsom argues that the Bank blundered by continuing to print money through its quantitative easing scheme even as the Covid pandemic was ending, adding:

“Interest rate rises began too late and were too small.”

The Bank’s tightening cycle began in December 2021, when it nudged rates up to 0.25% from just 0.1%.

It then moved in “baby steps” of quarter-point rate increases, until August 2022 when it raised by half a per cent – the largest single increase since 1995.

This chart from May shows the pace of the tightening programme:

The Daily Telegraph reports that the former Bank policymaker Adam Posen predicted interest rates would have to rise to 6.5% or higher to tame soaring prices, which would be likely to tip the economy into recession.

Posen said “policy errors” and Britain’s shrinking workforce – which he partly blamed on Brexit – had left Bank officials “wishfully talking about inflation declines”.

He added:

“The UK policy regime has lost some credibility.”

Oof. Norway’s central bank has just hiked its key interest rate by half a percentage point, more than forecast.

It’s another sign that inflationary pressures are worrying policymakers beyond Britain.

That lifts the Norwegian policy rate from 3.25% to 3.75%, still below the UK’s cost of borrowing (4.5%, until noon anyway).

Norges Bank also says another hike is likely in August.

Governor Ida Wolden Bache says:

“If we do not raise the policy rate, prices and wages could continue to rise rapidly and inflation become entrenched. It may then become more costly to bring inflation down again.”

We have our first interest rate increase of the day, in Zurich!

The Swiss National Bank has raised its key interest rate to 1.75%, up from 1.5%.

It took the move despite inflation slowing to 2.2% in May.

The SMB says today’s hike is meant to counter inflationary pressure, and warns that further rate rises can’t be ruled out in future.

It warns that economic growth was modest in the advanced economies in the first quarter of 2023, while inflation is still over central bank targets in many countries (Cough, particularly the UK …).

The SNB adds:

Core inflation in particular is still stubbornly elevated. Against this background, numerous central banks have tightened their monetary policy further, albeit at a somewhat slower pace than in the previous quarters.

The growth outlook for the global economy in the coming quarters remains subdued. At the same time, inflation is likely to remain elevated worldwide for the time being. Over the medium term, however, it should return to more moderate levels, not least thanks to the more restrictive monetary policy and due to the economic slowdown.

The shadow chancellor, Rachel Reeves, says she is “incredibly concerned about inflation”, as she presents Labour’s plan to help those in mortgage distress (see our story here).

Reeves says the UK’s average inflation rate of 8.7% doesn’t show the full picture.

Poorer households, who spend a greater proportion of their income on food, energy and mortgages, are facing even higher price rises [food inflation was 18.3% a year in May]

Reeves tells Radio 4’s Today programme:

There are some people who are particularly hard hit by what’s happening.

Q: So what should the Bank of England do today? Should they ‘hold their nerve’ and do whatever it takes to get inflation out of the system?

Reeves, who worked at the Bank for many years, won’t give a view. She says it would be “foolhardy” for someone who wants to be chancellor to comment on the decisions of an independent central bank.

Q: Former chancellors, such as Norman Lamont, have argued that a recession may be needed to squeeze out inflation. Would Labour live with a recession to fight inflation?

Reeves criticises this attitude, pointing out that recessions have a “disastrous” impact on families, pensioners and businesses.

She says the government must provide support for those who are suffering most – funded through a proper windfall tax on energy companies.

Q: But what would your short-term plan to get inflation down be?

Reeves reiterates her priority would be to help people who are struggling with higher prices. Freezing, or reducing, energy bills would have a direct impact on inflation, she says, adding:

The point is, however you use that money from the windfall tax, you could use it to shield people from those high prices.

She then explains that a Labour government would “instruct” banks to offer support to struggling mortgage-payers, including interest-only mortgages, extending mortgage terms, halting repossessions for six months, and protecting people’s credit ratings if they come forward for help.

Rishi Sunak is expected to declare today that he feels a “moral responsibility” to hit the target of halving inflation this year.

An advanced text released by his office shows that Sunak will tell an event today:

“I feel a deep moral responsibility to make sure the money you earn holds its value.

“That’s why our number one priority is to halve inflation this year and get back to the target of 2%.

And I’m completely confident that if we hold our nerve, we can do so.”

The foreign secretary, James Cleverly, has hit out at suggestions that the UK should intentionally enter a recession to dampen inflation.

Speaking to Sky News, he said the government remained committed to cutting inflation, but that triggering a recession was not the answer.

Cleverly said:

“What we need to do is we need to grow the economy.

“High interest rates don’t help with that. This idea that we should consciously be going into recession I don’t think is one that anyone in government would be comfortable subscribing to at all.”

Cleverly also insists that Rishi Sunak remains “absolutely committed” to halving inflation this year.

He told LBC:

“The prime minister is absolutely committed to halving inflation this year and we’re also making sure that we support those people who are struggling to pay the bills, and we’re also putting pressure on the lending industry, the banking industry, to make sure they do the right thing by their customers and help anyone that is struggling or is at risk of default.

“So, we’re dealing with the here and now, but we’re also dealing with the future.”

To hit that target, inflation must drop to 5% by December, down from 8.7% last month. It didn’t look particulary challenging at the start of the year, when Sunak made the pledge, but persistently high inflation makes it more stretching.

The Bank of England may judge that raising interest rate by a quarter of one per cent is the “less risky path”, rather than a larger half-point hike, says Michael Siviter, senior portfolio manager at Invesco Fixed Income.

Siviter says an increase in interest rates today is “almost certain” – with the debate being whether policymakers will raise rates by 25bps or choose to accelerate the tightening pace by hiking 50bps.

Siviter says

Despite higher than expected inflation data this week we still believe the majority of MPC members will favour a 25bps hike, with only one or two members voting for a 50bps move, mostly likely Catherine Mann and/or Jonathan Haskel….

Policymakers are mindful that there is considerable policy tightening in the pipeline already as fixed-rate mortgages struck in 2020 and 2021 refix to higher rates. The next three months will see a particularly large number of mortgages resetting.

The City is split over how high the Bank of England may raise interest rates, by the “cursed ratio” of 52:48.

The money markets are indicating that a chunky half-point increase in interest rates, from 4.5% to 5%, is a 52% probability.

A smaller, quarter-point rise, to 4.75% is a 48% chance, according to implied probabilities based on the value of interest rate swap derivatives.

52:48, of course, was the split in June 2016 when the public voted to leave the EU.

This ratio reappeared in September 2019 when MPs voted to take control of House of Commons business to block a no-deal Brexit.

It has also appeared in other polls …

At 8.7% in May, the UK’s annual inflation rate is much higher than the eurozone (6.1%) and the US (4%).

Q: Why does the UK have a worse inflation problem than other countries?

Ex-Bank of England policymaker Sir Charlie Bean explains that the UK labour market is tighter than in continental Europe – partly because half a million workers left the UK during the pandemic.

This means the UK still has historically low unemployment, and high vacancies, which adds to wage increases.

Leaving the EU is another factor, Bean tells the Today programme:

In addition, Brexit has made it harder for firms to suck in extra labour they need at short notice from abroad.

The supply of labour is less elastic – that also helps to strengthen the hand of labour.

Increased trade friction with Europe means product markets are less competitive, Bean adds.

Sir Charlie Bean, a former deputy governor for monetary policy at the Bank of England, believes he would vote for a large, half-point increase in interest rates today if he were on the monetary policy committee.

Bean told Radio 4’s Today programme that:

If I was on the committee, I would probably vote for a 50-basis point.

I’m sure on the committee … there will be quite a lot of discussion about whether to go for a quarter or a half.

Bean suggests that at the Bank’s last meeting at the start of May, policymakers may have thought they could have paused their rate increases for a while.

However, the news since that meeting has been “unambiguously bad on the inflation front”.

Inflation was higher than expected in April and May, at 8.7%, while the latest jobs report shows pay growth was much high than expected this spring.

Bean explains:

You put all of that together, and it’s a pretty clear signal that it needs further rate increases.

Good morning.

Britain’s mortgage time bomb is ticking louder today, with interest rates likely to be raised for the 13th time in a row at noon.

After Wednesday’s inflation shock, the Bank of England is expected to raise borrowing costs again as it tries to cool the cost of living crisis.

Bank rate is forecast to rise by at least a quarter of one percent, from 4.5% to 4.75%, but some in the City of London believe the BoE could unleash a half-point hike, to 5% – a level last seen in April 2008.

The Bank hopes that tightening monetary policy will squeeze rising price pressures out of the system. Yesterday, we learned that inflation failed to fall as hoped in May, with the annual CPI rate stuck at 8.7% – well over the UK’s 2% target.

Most alarmingly, core inflation (stripping out food, energy, alcohol and tobacco) rose in May.

The Bank of England is already facing heavy criticism for its failure to keep inflation close to its 2% target, including from some MPs, after leaving rates at record lows after the pandemic until December 2021.

Mike Riddell, head of Macro Unconstrained at Allianz Global Investors, argues that the Bank has “little choice” other than to continue hiking rates.

Riddell says:

Whilst headline inflation is flat vs last month, core inflation has accelerated even further. This leaves the Bank of England (BoE) with little choice other than to continue hiking rates, to weaken demand

It seems very unlikely to that the BoE would deliberately run monetary policy too loose

If problems on the supply side do not improve, then the BoE will be forced to further reduce demand to get wage growth lower. If it doesn’t, then the BoE may as well not have an inflation target

Raising interest rates will hurt borrowers, at a time when mortgage holders are already facing sharp increases in costs if they need a new deal.

The Resolution Foundation has calculated that, due to the rising interest rates, people looking to remortgage their homes will pay an average ?2,900 a year more from 2024.

More than 1 million households across Britain are expected to lose at least 20% of their disposable incomes thanks to the surge in mortgage costs expected before the next election, according to the Institute for Fiscal Studies.

Yesterday, JP Morgan economist Karen Ward, who advises the chancellor, Jeremy Hunt, warned that the Bank has to “create a recession” if it is to control inflation.

Labour are warning that “people are being hit hard by a Tory mortgage penalty”. They are proposing a five-point plan to cushion the hit from soaring mortgages and halt repossessions.

Under Labour’s plans, banks would be required to allow lenders to switch to interest-only repayments, extend their mortgage repayment period, reverse these measures at any point, and would have to wait at least six months before seeking to repossess a property, and make sure none of this had an impact on borrowers’ credit ratings.

The agenda

7.45am BST: French business confidence

8.30am BST: Switzerland’s central bank sets interest rates

9am BST: Norway’s central bank sets interest rates

9.30am BST: Latest realtime economic activity data for the UK

Noon BST: Bank of England decision on interest rates