Bank of England expected to hike interest rates further to 3.5%

Monetary Policy Committee to make decision that affects millions of mortgage holders

The Bank of England is expected to push interest rates even higher next week at its latest meeting, putting further pressure on mortgages.

In a crunch meeting, the nine members of the Monetary Policy Committee will make a decision that could push up the amount that millions of mortgage holders have to pay their banks every month.

The consequential decision is expected to push up the Bank’s base interest rate from 3 per cent to 3.5 per cent in December, to its highest for 14 years.

The expected 0.5 percentage increase will represent a slight cooling in rate increases, after the Bank’s MPC opted for a 0.75 percentage point rise last month – the highest single increase since 1989.

It will also be the ninth time in a row that the Bank hikes interest rates. Less than a year ago the rate was 0.1 per cent.

Economists at Deutsche Bank said they expect the rate to increase to 3.5 per cent at the meeting on Thursday, predicting five of the nine-strong committee to opt for this increase.

“Some good news around softening inflation expectations and easing recruitment difficulties will allow the MPC to slow the pace of tightening, avoiding a second consecutive 75bps [basis point] hike,” they added.

“But the Bank isn’t out of the woods just yet.

“Persistent inflationary pressures alongside lingering labour market tightness should result in another ‘forceful’ hike.”

Governor Andrew Bailey sought to cool market expectations for how high interest rates will ultimately increase at the previous meeting, amid improvements in the value of the pound and government borrowing rates since September.

Deutsche Bank has suggested that rates could push as high as 4.5 per cent next year, drifting from the Bank’s own previous prediction of 5.25 per cent last month.

However, experts at ING and Investec have been even more dovish, both predicting that the rate will peak at 4 per cent next year.

ING’s James Smith, Antoine Bouvet and Chris Turner said in a note to investors: “When the Bank of England hiked by 75 basis points for the first time back in November, it seemed obvious that it would be a one-off move.

“The forecasts released back then suggested that keeping rates at 3 per cent would see inflation overshoot (just) in two years, while raising them to 5 per cent would see an undershoot.

“In other words, we should expect something somewhere in the middle, and that’s why we think Bank Rate is likely to peak at 4 per cent early next year.”

They predicted that interest rate hikes could stop in February but suggested that continued wage pressures in the labour market mean the Bank could be “less swift to cut rates than the US Federal Reserve”.