Brits should brace for further rate hikes from Bank of England, City economists warn

The Bank will rapidly pivot policy toward getting on top of Britain’s cost of living crunch, City economists are betting after yesterday’s decision to raise rates at back-to-back meetings for the first time since 2004

Households should brace for further rate hikes from the Bank of England this year as it steps “up its fight against inflation”.

The Bank will rapidly pivot policy toward getting on top of Britain’s cost of living crunch, City economists are betting after today’s decision to raise rates at back-to-back meetings for the first time since 2004.

Today’s “decision is consistent with a more front-loaded hiking cycle,” Sanjay Raja, senior economist at Deutsche Bank, said.

“The message from the MPC was… more hikes are likely – particularly in the near-term,” he added.

Experts tended to agree with Raja’s view, with several pencilling in a further three hikes in 2022.

“With four [Monetary Policy Committee] members wanting to raise rates to 0.75 per cent and all members deciding to sell the Bank’s holdings of corporate bonds, it feels as though the Bank is stepping up its fight against inflation,” Paul Dales, chief UK economist at consultancy Capital Economics, said.

Dales is forecasting borrowing costs will hit 1.25 per cent by the end of the year, sending them to the highest level since 2009.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, another consultancy, said: “The urgency shown by some MPC members this week has persuaded us to pull forward our forecast for the next 25bp increase in Bank Rate to March, from May, and to pencil-in another 25bp hike for May.”

However, Governor Andrew Bailey explicitly told investors to temper their expectations, urging them to “not get carried away”.

The Bank’s projection of inflation to peak at 7.25 per cent in April after the energy regulator’s price cap adjustment takes effect will prompt Threadneedle Street to shift from focusing on the pandemic to easing the cost of living, economists are betting.

A sharp erosion of living standards means the Bank has the difficult task of balancing driving down inflation and maintaining economic growth.

Real incomes are projected to drop two per cent this year, the worst fall in take home pay since 1990, prompting the Bank to downgrade this year’s UK growth forecasts to 3.75 per cent from five per cent.

Brits will pull back on spending to offset tighter budgets, the Bank warned.

“Rising rates will only add to the squeeze on households’ budget, with higher mortgage payments coming on top of higher energy bills as well as the rise in National Insurance this April,” Yael Selfin, chief economist at KPMG UK, said.