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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Bank of England governor denies trying to trigger recession after hiking interest rates to 5% – as it happened

Charlie Bean Interest Rates Inflation The Bank of England United States Bank of England United Kingdom Brexit Monetary Policy
The Bank of England in the City of London.
The Bank of England in the City of London. Photograph: Yui Mok/PA

FTSE 100 closes at three-week low

In the City, the FTSE 100 share index ended the day at its lowest closing level since the start of June.

The blue-chip share index closed 57 points down at 7502, down 0.76%.

Chris Beauchamp, chief market analyst for IG, said fears that high interest rates will cause a recession hit share prices:

“The FTSE 100 has fallen to a three-week low today as investors worry about the impact of more rate hikes on the UK economy.

“The losses are even more pronounced on the mid-cap FTSE 250 due to its UK exposure.

“A recession in the UK now seems an inevitability with the Bank of England committed to more rate hikes, and at a faster pace.

“Everything is now subordinate to the task of getting inflation under control, with heightened recession risk accepted as a necessary evil.”

Updated

Closing post

Time for a recap.

The governor of the Bank of England has denied aiming to create a recession, in an attempt to cool the UK’s inflation problem.

After lifting UK interest rates to the highest level since 2008 at noon today, Andrew Bailey said:

We’ve got an economy that is much stronger and more resilient than we expected it to be. Part of that is because energy prices have come down so much, which is good news. It’s good news.

So we’re not we’re not expecting, or desiring a recession. But we will do what is necessary to bring inflation down to target.

Bailey also declared that the current level of wage increases, and prices rises, are not sustainable with the Bank’s goal of lowering inflation.

Insisting that the Bank expects inflation to fall, he added:

And it’s important than that price setting and wage settling reflects that because the current levels, I’ll be absolutely honest, are unsustainable.

At noon today, the Bank’s monetary policy committee (MPC) increased rates for the 13th consecutive time to the highest level since 2008. Before the decision was announced, financial markets were evenly split on whether the Bank would vote for a half-point rise or a smaller quarter-point increase.

Amid a growing sense of alarm over stubborn inflationary risks, the MPC said:

“There has been significant upside news in recent data that indicates more persistence in the inflation process, against the backdrop of a tight labour market and continued resilience in demand.”

The Bank said that it would continue to watch for persistent inflationary risks, and would push interest rates higher if necessary.

This latest rate rise makes it clear the Bank of England “means business” when it comes to tackling inflation, said professor of global economy and deputy dean of Cranfield School of Management, Joe Nellis.

Nellis added:

Unfortunately, further financial hardship is expected for many millions of households - and those at the lower end of the income scale with variable rate mortgages, or who are in the process of re-mortgaging, will be hit the hardest.

Rishi Sunak insisted after the decision that his government would “remain steadfast in its course” to curb inflation. The prime minister faces growing calls to intervene as millions of households feel the strain from surging mortgage costs.

“The reason interest rates are going up is because inflation is too high,” he told the Times CEO summit. Sunak added:

“This is something that makes everybody poorer, that’s what inflation does. That’s why we’ve got to grip it, we’ve got to reduce it and interest rates are a part of that.

“Now, I always said this would be hard – and clearly it’s got harder over the past few months – but it’s important that we do do that.”

The financial markets now indicate there is a 33% chance that the Bank unleashes another half-point hike in August, taking interest rates to 5.5%. Bank rate is expected to hit 6% by the end of this year, and remain there until next June.

Chancellor Jeremy Hunt backed the Bank of England’s move, saying that high inflation is “a destabilising force eating into pay cheques and slowing growth”.

Unions criticised the Bank’s move, with the TUC blaming “dangerous groupthink in the Bank of England and Downing Street”.

The Green Party called for a wealth tax, to fund more support for struggling households and those on benefits.

There was also drama in Turkey, where the central bank almost doubled interest rates.

The Central Bank of Turkey raised interest rates for the first time in more than two years, from 8.5% to 15%, lower than some economists had forecast. The lira hit a record low afterwards.

And in other news…

Shares in Ocado have soared, amid market speculation that the online supermarket and retail technology group could be the target of a takeover.

A fresh round of rail strikes is set to disrupt national networks during July, after the RMT union announced that 20,000 workers would stage three days of walkouts.

The cost of a room at Premier Inn’s hotels in London rose sharply over the last three months, with tourists visiting for the coronation of King Charles and strong demand for budget stays in the capital boosting the chain.

A legal challenge against the government’s decision to build the Sizewell C nuclear power plant has been rejected.

The UK’s largest dairy cooperative has said there could be further increases in the price of milk and other dairy products if the government does not urgently tackle labour shortages in farming.

Sky has launched a smart camera for its streaming television to allow customers to watch live and on-demand TV remotely with friends, place video calls via Zoom, track workouts and play motion-controlled games.

Analysis: Bank of England faces flak as economic history fails to repeat itself

Today’s latest Bank of England rate hike is an admission that 12 rises over more than 18 months have not been enough to tackle the problem, my colleague Phillip Inman writes.

Or, as the minutes said, the impact of shocks from Covid and the energy price crisis “were likely to take longer to unwind than they had done to emerge”, adding that the risks of inflation remaining high “were skewed to the upside”.

A 13th rise, and a big one at that, was needed to calm spending in the economy and reduce an inflation rate that remained stubbornly high at 8.7% in May, more than four times the 2% set by parliament as the central bank’s target. That was the view of seven MPC members. Two others said the Bank had caused enough pain and voted for a pause, to keep interest rates at 4.5%.

Will rates go higher? There were no clear signals. In the minutes of its latest meeting, buried at point 47, the monetary policy committee (MPC) said only: “If there was evidence of persistent pressures, then further tightening in monetary policy would be required.”

The financial markets expect the Bank will continue raising, to as high as 6% before the job is done and inflation slayed. More here.

What today's UK interest rate rise means for you

Thursday’s move is yet more bad news for the 1.4 million people on a variable-rate residential mortgage.

Roughly half are either on a base-rate tracker or discounted-rate deal, with the remaining 50% or so on their lender’s standard variable rate (SVR).

A household with a tracker mortgage currently at 5.5% will see their pay rate rise to 6%. These deals directly follow the base rate. This means their monthly payments will rise by £43 a month, assuming they have a £150,000 repayment mortgage with 20 years remaining. Their monthly payments rise from £1,032 to £1,075.

Those looking to remortgage face financial pain this year, but savers could benefit…. if banks pass higher interest rates on to them….

More here:

J.P.Morgan, Deutsche Bank and Goldman Sachs have all raised their forecast for the peak in UK interest rates to 5.75%, after the half a percentage point hike announced today.

Goldman Sachs expects a second 50 bps hike in August and a final quarter point hike in September.

J.P.Morgan, though, predicts a smaller 25bps (quarter-point) rise in August, followed by two more at future meetings.

JPM economist Allan Monks said.

“This new policy rate level in our forecast recognizes that there is a dynamic between wages and prices that needs to be stopped, and assumes the BoE will need to hike further in order to trigger a significant weakening in the labour market.”

Today’s interest rate hike will hurt borrowers, and add to the strains on those who need to remortgage this year.

But still, analysts at Morgan Stanley say it’s hard to argue with the Bank of England’s reasoning that “the scale of the recent upside surprises...suggested a 0.5 percentage point increase in interest rates was required at this particular meeting.”

However, they add that the rest of the minutes of this month’s meeting are “slightly puzzling”.

They say:

For one, aggressive hikes are probably most warranted when there is much more ground left to cover, in terms of tightening – think the Fed or the ECB early in their hiking cycle last year.

The MPC’s guidance is unchanged (“if there were to be evidence of more persistent pressures, then further tightening...would be required”), so it is de facto not even signalling that more hikes are the default stance.

On the other hand, the minutes make no effort to lean against the market pricing either. The visibility on the end point of this cycle clearly remains very low.

Guardian Newsroom: Can the UK avoid a recession?

Next month, a panel of Guardian journalists and experts will discuss the desperate state of the UK economy at a livestreamed event.

They will consider the UK’s inflation crisis, and the consequences of today’s interest rate hike for those facing financial insecurity.

Here’s the details:

Guardian Newsroom: Can the UK avoid a recession?

Join Larry Elliott, Heather Stewart and Ann Pettifor in this livestreamed event on the desperate state of the UK economy. On Thursday 20th July, 8pm.

The Bank of England has “bared its teeth” today, with its half-point rate hike, says Capital Economics.

However, they also believe it “needs to bite harder”, through further increases in borrowing costs this year.

Ruth Gregory, Capital Economics’s deputy chief UK economist, says:

The 50 basis point (bps) interest rate rise by the Bank of England today, from 4.50% to a near 15-year high of 5.00%, is unlikely to be the last hike given the UK’s higher and longer lasting inflation problem.

We think the inflation battle is not yet won and that the Bank will raise rates at least once more, in August to 5.25%, and keep rates at their peak until the second half of next year.

Heightened worries around the persistence of inflation forced the Bank of England to hike interest rate by half a percentage point today, says Deutsche Bank’s chief UK econmist Sanjay Raja.

Raja, who had expected a smaller, quarter-point rise, tells clients:

What did we learn today?

First, more ‘forceful’ hikes are now on the table. Second, despite the bigger rate hike today, the MPC stuck to its long-held forward guidance, giving itself more optionality heading into summer. Third, risk management considerations are clearly in play, given the persistence in inflation and wage dynamics. And fourth, financial stability risks may not be as pertinent as we assumed.

Where does this leave us?

We now see Bank Rate peaking at 5.75%, with three quarter point hikes in August, September, and November likely. Why not another 50bps hike? We see more downside risks to services inflation in the next print, relative to the Bank’s forecast for broadly unchanged services momentum.

Risks to our terminal rate call are tilted to the upside, particularly with the MPC chasing spot inflation and wage data, which may take longer to cool. And given longer and more variable lags in monetary policy transmission, we see the Bank of England potentially having to deliver more – not less – tightening to get inflation back under control. A peak terminal rate of near 6% no longer looks unattainable. But risks of a 2024 recession are very much on the rise. We maintain our call for the first rate cut to come in Q2-24, but now see risks skewed to swifter, more front-loaded, easing cycle.

Updated

Analysts at Berenberg Bank predict the Bank of England will spend next year cutting interest rates.

Berenberg now expect UK interest rates to peak at 5.5% by September, before the BoE shifts into loosening mode, and cuts rates back to 4% by the end of 2024.

They say:

The more pain the BoE inflicts on mortgage holders now, the more it may have to take back later on.

The European Economic team at Nomura have warned that the Bank of England risks becoming “the fool in the shower”.

That’s not a garbled reference to a Led Zepplin classic, but rather to the idea that any stimulus to the economy should be turned up or down slowly, so you can judge the effect, rather than going wild with the taps.

Nomura say:

We have added an extra hike to our profile and now see the Bank tightening in August, September and November for a peak of 5.75%.

Markets are looking for around a 6.10% peak by early next year.

Looking beyond that, with rates being raised further than we had originally expected, more rate cuts would be ultimately required to return Bank Rate back to neutral as and when inflation starts to behave. That would be a nice outcome indeed – the Bank being able to slowly return Bank Rate to neutral after declaring ‘job done’ on inflation.

The bigger risk, however, is that in the words of Milton Friedman (and more recently Silvana Tenreyro) the Bank ends up being the ‘fool in the shower’ and hikes too much, requiring a swifter correction should recession ensue.

Updated

Sunak: We will get through inflation battle

Prime minister Rishi Sunak has pledged that “we are going to get through” the UK’s inflation squeeze.

Speaking at Kent at a PM Connect, Sunak says he knows people will be anxious about today’s interest rate increase.

He adds:

I’m here to tell you that I am totally, 100% on it. And it is going to be OK and we are going to get through this and that is the most important thing I wanted to let you know today.

Sunak is then asked….

Q: Is recession a price worth paying to get inflation down?

Sunak says people expected the economy go to into recession this year. That did not happen. That is partly why the inflation challenge is harder, he says.

He says halving inflation is the right priority.

My colleague Andrew Sparrow’s Politics Live blog has full details.

Bailey warns against "unsustainable" wage and price rises

BoE governor Andrew Bailey has warned companies against raising prices to rebuild their profit margins, and cautioned that pay growth is too strong.

During his interview with Sky News today, he is asked:

Q: You talk in the minutes of this month’s meeting that wage growth is too strong – so are people asking for too large wage settlements right now?

Bailey says this is an important issue, so he wants to be “very clear”:

“We have got to get, and we will get, inflation back to its [2%] target.

To do that, we cannot continue to have the current level of wage increases. And we can’t have companies seeking to rebuild profit margins, which means prices continue to go up at their current rates.”

Bailey added that the Bank does expect inflation to come down.

And it’s important than that price setting and wage settling reflects that because the current levels, I’ll be absolutely honest, are unsustainable.

[Data last week showed that regular pay (excluding bonuses) was 7.2% among employees in February to April 2023, the highest on record outside of during the Covid-19 pandemic].

The Bank has found itself in hot water over this issue. Bailey himself was heavily criticised for saying last year that workers should refrain from asking for inflation-matching pay rises.

Last month, he rebuked chief economist Huw Pill for saying people and businesses should accept they are poorer now because of inflation.

Bailey denies trying to cause UK recession

Bank of England governor Andrew Bailey has denied that the UK’s central bank is looking to trigger a recession as it tries to cool inflation.

In an interview with Sky News, Bailey said the Bank raised interest rates to 5% today because inflation looks much more persistent, although he still thinks it will “come down markedly” this year.

But he insists that the BoE is not seeking to precipitate a recession, saying:

We’ve got an economy that is much stronger and more resilient than we expected it to be. Part of that is because energy prices have come down so much, which is good news. It’s good news.

So we’re not we’re not expecting, or desiring a recession. But we will do what is necessary to bring inflation down to target.

[Yesterday, JP Morgan economist Karen Ward said the Bank needs to “create a recession” to cool demand, and price rises].

Q: Will you apologise for continually failing to forecast the sharp rises in UK inflation? What went wrong with your forecasting?

Bailey replies that the Bank has already announced it will hold an external review of its forecasting. He says forecasting has been very difficult in “an era of such big things going on around us”, such as the Ukraine war and the Covid-19 pandemic.

Bailey insists that the Bank has taken “decisive action” by raising interest rates since December 2021.

I would say, though, that within this in terms of tackling inflation, we’ve now raised interest rates by nearly 5% in 18 months. So we’ve taken decisive action.

Q: Markets think there will be more rate hikes to come. Is that fair?

Bailey says the Bank will respond to evidence. It’s not signalling what will come next, but it was “absolutely imperative” that it took action today.

Q: Is the UK an outlier on inflation, and why?

Bailey argues that core inflation looks sticky across a lot of countries.

Updated

Sushil Wadhwani, a member of Jeremy Hunt’s Economic Advisory Council, has praised the Bank of England’s decision to hike interest rates yet again.

Wadhwani, a former member of the interest rate-setting MPC, believes the Bank is learning the lessons of recent months, having acted too cautiously on rates.

Speaking to BBC Radio 4’s World at One programme, he said:

“I think the Bank took the view that a stitch in time saves nine.”

He suggested the Bank “essentially brought forward” rate rises:

“It is the first time in this hiking cycling that they have surprised in a more hawkish direction.

“I would certainly welcome it.”

Boe Governor: I know this hurts, but inflation is still too high

Andrew Bailey, the governor of the Bank of England, has released a video clip explaining why the Bank has raised UK interest rates to 5%.

He says:

We’ve taken this decision because unfortunately, inflation is still too high. The good news is our economy is doing better than we thought it might. Inflation has begun to fall and unemployment is very low.

But recent data has shown us that further decisive action is needed in order to be sure we get inflation back down. And that’s why we’ve acted today.

Bailey is right that inflation is lower than October 2022, when it hit 11.1%, But it was unchanged in May at 8.7% (one piece of the ‘recent data’ he cites).

Bailey continues by pledging that the Bank will “continue to do whatever is necessary” and warns that it would be a mistake to let inflation stay high.

The BoE governor says:

I know this is hard. Many people with mortgages or loans will be rightly worried about what these changes mean for them. But if we don’t raise rates now, high inflation could stay with us for longer and inflation hits all of us, particularly those who can least afford it.

Raising interest rates is the best way we have of getting inflation back down to the 2% target.

Pound is 'rabbit in headlights' after rate hike.

The pound has dipped a little against the US dollar, to $1.275, after today’s large hike in UK interest rates.

In normal times, higher interest rates at home make the Pound worth more abroad.

But we are living through “far from normal times”, says Simon Phillips, managing director at the travel money firm No1 Currency.

Phillips explains::

Rather than sending sterling soaring, today’s bigger than expected jump in interest rates has left the Pound like a rabbit in the headlights.

Sterling has been fluctuating wildly as global investors decide whether buying Pounds is still a good bet with so much uncertainty surrounding the UK’s economic prospects.

“Nevertheless the Pound is still hovering close to a 14-month high against the US Dollar, and this week it hit its highest level against the Euro since last August.

Key event

Britain’s blue-chip share index is on track to close at its lowest level since the start of June, after today’s interest rate hike.

The FTSE 100 is down 85 points, or 1.12%, at 7474 points, as traders anticipate that higher interest rates will weaken the economy – possibly causing a recession – and suppress demand.

Housebuilders, such as Persimmon (-3.7%) and Taylor Wimpey (-3.1%) are among the fallers, along with property portal Rightmove (-3.5%)

The domestically focused FTSE 250 index, which includes more UK companies than the FTSE 100, has shed 1.75%. Commercial property firm British Land are the top faller, down 5.8%, after its shares went ex-dividend today (meaning new shareholders won’t get the next payment to investors).

Fiona Cincotta, Senior Financial Markets Analyst at City Index, says the FTSE “crashed lower” after the Bank of England voted 7-2 to hike interest rates by 50 basis points to 5%.

Cincotta explains:

This was the first jumbo rate hike from the central bank since February and came despite the market only pricing in a 40% probability of such a large move.

After yesterday’s inflation shock, with core inflation showing that it still hasn’t peaked, the central bank felt it needed to act aggressively to show that it is serious about fighting inflation. I think there was a fear among policymakers that if they didn’t go big, the price/wage spiral could strengthen.

After taking interest rates to 5% and signalling that there could be more hikes to come, the UK economy is more likely to fall into a recession – perhaps what the BoE is after to ensure that inflation expectations don’t become embedded.

While the pound is rising now, gains are limited, which is a reflection of those recession fears; the outlook for sterling is weaker across the year. As the likelihood of a recession rises, the pound is likely to come under pressure.

The FTSE is also feeling the pain, dropping over 1%, with housebuilders and consumer discretionary stocks under pressure amid the prospect of higher mortgage rates and lower disposable income.

Updated

Rates to hit 6% and stay there until May

UK interest rates are forecast to hit 6% by the end of this year, and stay there until May 2024, following today’s half-point increase in borrowing costs.

The mortgage market is “a horror show” for anyone whose fixed rate deal ends in the next few weeks, says Laura Suter, head of personal finance at AJ Bell.

Around 800,000 homeowners will need to re-mortgage before the end of the year, Suter points out, adding:

Many who fixed two years ago are facing the prospect of a tripling of their mortgage interest, which will add hundreds of pounds to the average monthly mortgage bill.

“The worst thing a homeowner can do right now is bury their head in the sand and just let their fixed-rate deal end. The Standard Variable Rates that mortgage lenders charge those who have come off their fixed deal are truly eye-watering now, standing at 7.5% on average* – even one month of mortgage payments at that rate could be crippling to someone’s finances.

Mortgage holders who chose to move to a standard variable rate deal, or a tracker, are also being “clobbered”, Suter points out.

Updated

Bank of England super-hike sparks volatility in the markets

As predicted, there has been volatility in the financial markets after the Bank of England lifted UK interest rates to 5%.

UK short-term bond prices have gyrated. Initially, the yield (or interest rate) on two-year government bonds dropped – which would be a relief to mortgage holders, as fixed-term loans are priced off those rates.

One observer compares this move (a rise in bond prices) to an emerging-market economy trying to regain credibility.

However, two-year bond yields have since moved higher again, as investors anticipate further interest rate increases in future months.

The pound has been choppy too. It jumped by half a cent against the US dollar as the news of the large interest rate increase was announced, only to then sink by a cent, and then rise back towards where it started…

Susannah Streeter, head of money and markets at Hargreaves Lansdown, says:

The decision has sparked a fresh round of turbulence, with 2-year gilt yields falling back below 5% then shooting back above recent highs to over 5.1% as uncertainty reigns about how far rates will go. Investors are trying to assess whether today’s big bazooka now, might be enough to stem further rate hikes or whether more will still be necessary.

The pound has had a case of the jitters, rising sharply to 1.283, before losing ground again to 1.276. Volatility is set to remain the order of the day as investors assess what impact this hawkish move will have on the UK economy.

Reeves: households need support through cost of living crisis

Families across Britain will be “desperately worried” about what today’s interest rate rise might mean for them, says Rachel Reeves MP, Labour’s Shadow Chancellor.

Reeves adds:

“They want to know that support will be there if they need it.

“Instead the Chancellor and Prime Minister are burying their heads in the sand and failing to clean up the mess this Tory government has made.

“Labour’s five-point plan to help ease the Tory mortgage penalty and our Renters’ Charter would provide practical help right now.

“Longer-term, Labour will build a stronger, more secure economy and get it growing again.”

Money Advice Trust: interest rate rise “piling more pressure” onto struggling households

Today’s interest rate increase will pile more pressure onto struggling households, fears the Money Advice Trust, the charity that runs National Debtline and Business Debtline.

Jane Tully, director of external affairs and partnerships at the Money Advice Trust, says the 13th interest rate rise in a row comes as some borrowers are already struggling.

For homeowners whose monthly repayments have increased, the strain is already starting to show – with one in five saying they are already having trouble affording repayments.

Higher mortgage costs also lead to higher rents, making this an incredibly worrying time for many tenants.

She urges lenders to provide support (a message the government may hammer home when Jeremy Hunt and Rishi Sunak meet with UK banks).

Tully says:

“Lenders already have a range of options they can use to help people in difficulty with their mortgage. However, lenders, regulators and government must act to ensure these options, like switching to interest-only for a short period, payment holidays and extending mortgage terms, are readily available to anyone who needs them. This must include giving people flexibility to reverse any changes if and when someone’s situation improves.

“Anyone worried about their mortgage payments should speak to their lender. Help is also available from free debt advice services like National Debtline.”

The Green Party are calling for a wealth tax to fund help for struggling families.

Molly Scott Cato, Green Party finance and economy spokesperson, says today’s interest rate increase will have a devastating impact on people across the country.

Scott Cato says a levy on the wealthiest could fund inflation-matching pay rises for public sector workers, and an increase in Universal Credit.

“It’s no surprise the government is willing to take such a callous approach of doing nothing to help those who need it most when both the Chancellor and Prime Minister are millionaires. They seem to be completely out of touch with the impacts of inflation and interest rate rises on working people.

“It should be totally unacceptable for people on the receiving end of falling wages and rising prices to be told that they are the problem.

“And that is why Greens would be looking for ways to support the economy without fuelling inflation by shifting consumption from the wealthy to those on lower incomes.

“A first step would be to pay public sector workers in line with inflation. Since their output is not sold in a market it would only add indirectly to inflation.

“This could be funded by taxing the super-rich, whose consumption does contribute to inflation. Profiteering companies, financial speculators and the wealthy need to bear the burden of dealing with a crisis that is rooted in misguided ideology and Tory unfairness.

“And we would increase Universal Credit by £40 per week to help those who are in the most need right now.”

Another rate hike expected in August

The financial markets are expecting the Bank of England will raise interest rates again at its next meeting, in the first week of August, following today’s large hike.

Edward Park, Chief Investment Officer at Brooks Macdonald, explains:

“Looking ahead, bond investors are pricing in a further interest rate hike at the August meeting after seven out of nine of the of the Bank of England’s voting members opted for larger 50bps rise today.”

Currently, a quarter-point rise to 5.25% is seen as most likely, but another hefty half-point hike to 5.5% can’t be ruled out.

Park adds that the Bank is looking to establish its hawkish credibility in the face of the highest inflation in the G7.

“The market is of the view that Bank of England is losing the battle against inflation, and we continue to see further volatility within UK gilt prices.

The UK has now had two above expectation inflation releases in a row, data showing a pay growth that is much stronger than expected and investors have priced in a 6% Bank of England base rate being hit before the end of 2023. This is not only bad news for mortgage holders but the UK Government as it looks to service its debt which has just surpassed 100% of GDP for the first time in over 60 years.

Jeremy Hunt has written back to Andrew Bailey, reassuring the governor that the Bank of England has his full support.

Hunt says the government’s commitment to reducing inflation is ‘iron-clad’ (although foreign secretary James Cleverly struggled to explain the government’s plan to halve inflation this morning).

Hunt tells Bailey:

High inflation is the greatest immediate economic challenge that we must address. That is why the Government has made it a priority to halve inflation this year, on the path back to the target of 2% CPI.

Our commitment to this target is iron-clad and it applies at all times. The Bank of England has my full support as you take action to return inflation to this target through your independent monetary policy decisions, in line with the primacy of price stability in the Government’s monetary policy objective.

Businesses and households should have confidence that the Government and the Bank of England understand the challenges they face from rising prices, and be in no doubt that we will act together to bring inflation under control.

Hunt adds that he looks forward to working closely with Bailey “in the coming months” – a vote of confidence for the under-fire governor (dubbed the Plank of England this morning, for not getting inflation under control).

Andrew Bailey: inflation remains “much too high”.

The Bank of England governor has told chancellor Jeremy Hunt that inflation remains “much too high”, but he still expects it to fall by the end of the year.

Andrew Bailey must write to the chancellor everytime inflation remains too far above its 2% target.

And today, the governor explains that “CPI inflation remains much too high, and inflation in core goods and services have risen”.

Bailey warns the chancellor that services inflation could remain elevated in the near term.

But core goods inflation is expected decline later this year, supported by developments in cost and prices indicators earlier in the supply chain.

Bailey writes:

Food price inflation, meanwhile, is projected to fall further in coming months, reflecting the waning of pass-through from previous shocks. Headline CPI inflation is expected to fall significantly further during the course of the year, in the main reflecting developments in energy prices.

Recent levels of wholesale gas futures prices will lead to a fall in July and, if sustained, again in October in the Ofgem cap on energy prices faced by households. As a result, towards the end of the year, falls in energy prices can be expected to pull down significantly on annual CPI inflation.

Rate hike criticised by unions

TUC General Secretary Paul Nowak has condemned today’s decision by the Bank of England to raise the base rate by 0.5 percentage points to 5%.

Nowak warns that “dangerous groupthink” will cost people their jobs and homes, saying:

“This interest rate hike is the result of dangerous groupthink in the Bank of England and Downing Street. Pushing interest rates so high that the economy is driven into recession will only make the current crisis worse, costing people their jobs and their homes.

“Inflation was caused by global energy shocks and government should be doing more to ensure households and businesses benefit as prices fall.

“Instead of scapegoating workers who are desperate for their pay to keep up with prices, ministers should focus on a credible plan for sustainable economic growth and rising living standards.”

Unite general secretary Sharon Graham fears that hundreds of thousands of mortgage holders are at risk of missing payments, due to the squeeze on incomes.

Graham says:

“Yet again the Bank of England is making the wrong choice - inflicting pain on ordinary households across the UK by hiking up interest rates.

“This latest rise is nothing more than a hand-out to the banks who have already made bumper profits from 12 other interest-rate hikes. The 13th could put hundreds of thousands of mortgage holders in peril of not being able to pay their mortgage.

“Instead of blaming inflation on workers’ wage rises it’s high time the Governor of the Bank of England tackled the profiteers of corporate Britain. They are to blame for the current crisis.”

Hunt: Must stick to our guns on inflation fight

Chancellor of the Exchequer Jeremy Hunt is backing today’s interest rate rise.

The Bank of England is independent, of course, but Hunt says that it is important to take action now to bring inflation down.

Hunt says:

“High inflation is a destabilising force eating into pay cheques and slowing growth.

Core inflation is higher in 14 EU countries and interest rates are rising around the world, but the lesson from other countries is that if you stick to your guns, you bring inflation down.

“Our resolve to do this is watertight because it is the only long-term way to relieve pressure on families with mortgages. If we don’t act now, it will be worse later”.

Abrdn: This could be a milestone towards UK recession

Luke Bartholomew, senior economist at investment giant abrdn, warns that today’s large hike in UK interest rates could be a "milestone” towards the next recession.

Bartholomew says today’s decision to hike UK interest rates by half a percentage point “will come as a shock for many in the market”, despite the speculation that it could happen.

He adds that the Bank risks looking like it’s panicking after yesterday’s shockingly high inflation reading:

“The risk for the Bank of England in causing such as surprise is they end up looking panicked and increase uncertainty about the likely future path of interest rates. However, policy makers clearly feel that that the recent run of inflation data has been ugly enough to warrant such a large move to try to keep a lid on inflation expectations.

“It is increasingly difficult to see how the UK avoids a recession as part of the process of bringing inflation down. And today’s large rate increase will probably be seen in retrospect as an important milestone towards that recession.”

BoE: Further tightening may be required

The Bank of England also warns that it could continue to raise interest rates, if wage growth and service sector price rises don’t slow.

The minutes of this month’s meeting, just released, say:

The MPC would continue to monitor closely indications of persistent inflationary pressures in the economy as a whole, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation.

If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be require

Why the Bank raised interest rates to 5%

The Bank of England’s monetary policy voted to raise interest rates by half a percentage point because the risks to inflation are “skewed significantly to the upside”.

The BoE says there is the potential for “more persistent strength in domestic price and wage setting” – ie, that firms might keep raising prices, and that workers will push for pay increases to protect them from inflation.

The seven members who all voted for a half-point hike argued that the unexpectedly high service sector inflation, and wage increases mean interest rates must be set even higher.

The minutes of this month’s meeting explains:

Seven members judged that a 0.5 percentage point increase in Bank Rate, to 5%, was warranted at this meeting.

The second-round effects in domestic price and wage developments generated by external cost shocks were likely to take longer to unwind than they had done to emerge.

There had been significant upside news in recent data that indicated more persistence in the inflation process, against the background of a tight labour market and continued resilience in demand. Some indicators of future pay growth and goods inflation had weakened, but their properties as leading indicators had not been tested in a similar period of high inflation.

The scale of the recent upside surprises in official estimates of wage growth and services CPI inflation suggested a 0.5 percentage point increase in interest rates was required at this particular meeting.

But, Swati Dhingra and Silvana Tenreyro argued – in vain – to keep interest rates at 4.5%.

The minutes explain that the pair believe inflation will fall without a further tightening of policy. Here’s why:

Two members preferred to leave Bank Rate unchanged at 4.5% at this meeting. There were two main factors underlying their votes.

First, as the energy price shock and other global cost-push shocks continued to reverse over the course of 2023, goods price inflation should fall sharply, which, with some lag, would reduce associated persistence in domestic wage and price setting. In contrast with the strength in recent outturns, forward-looking indicators were pointing to material falls in future wage and price inflation.

Second, the lags in the effects of monetary policy meant that sizable impacts from past rate increases were still to come through.

Bank split over interest rate decision

The Bank’s monetary policy committee was split over the decision to hike UK interest rate by half a percentage point.

Seven members (Andrew Bailey, Ben Broadbent, Jon Cunliffe, Jonathan Haskel, Catherine L Mann, Huw Pill and Dave Ramsden) voted in favour of the proposition.

But two members (Swati Dhingra and Silvana Tenreyro) voted against the proposition, preferring to maintain Bank Rate at 4.5%.

BANK OF ENGLAND INTEREST RATE DECISION

Newsflash: The Bank of England has raised UK interest rates to a 15-year high of 5%, as it continues its battle against inflation.

Despite concerns that mortgage-holders face a timebomb of higher rates, the Bank’s monetary policy committee decided to raise its benchmark rate from 4.5% to 5%, an increase of half a percentage point.

This is the 13th increase in UK interest rates in a row, going back to December 2021.

City investors has been split over whether the Bank would choose a quarter-point, or a larger, half-point hike.

The BoE was under pressure to tighten policy after UK inflation remained stubbornly high in April and May, at 8.7% in both months.

But higher interest rate will intensify the pressure on borrowers, and could mean fixed-rate mortgage costs continue to rise. Economists fear that millions of households will lose major chunks of their income in the coming months to higher mortgage rates.

Sunak spokesman: BoE governor has PM's support

Over in Westminister, the PM’s spokesman has told reporters that BoE governor Andrew Bailey continues to have Rishi Sunak’s support….

Asked whether Bailey had been doing a good job, the spokesperson said:

“He continues to have the prime minister’s support.”

“We’re working incredibly closely with the Bank of England and he continues to support the work they do. And we as government continue to work closely with them on the shared priority to reduce inflation.”

Updated

The financial markets could be volatile after the Bank of England’s rate decision hits the wires in around seven minutes.

The language used by the BoE, as well as the actual rate decision, will be critical, says Forex Analytix.

They explain:

For example, A 50bp [half-point rise] with a signal for a pause won’t be as hawkish an outcome.

A 25bp with a strong nudge to further hikes in the next meetings wouldn’t be as unhawkish.

A potential split on the Bank’s monetary policy committee could also shift UK assets (such as the pound, and government bonds), they add:

7-2 in favour of a hike/hold is expected (as previously). A hawkish twist would be one or both of the two arch doves voting for hikes (It’s the last meeting for one of them, Tenreyro).

The markets are currently predicting that UK interest rates will be pushed up to around 6% by the end of the year, up from 4.5% at present.

Tensions is mounting in the City of London, as investors brace for the Bank of England’s interest rate decision at noon.

There’s real uncertainty about which way the Bank’s policymakers will jump today. The money markets currently suggest a quarter-point increase is more likely (57% chance) while a half-point hike has slipped to (43%).

Joel Kruger, market strategist at LMAX Group, sets the scene….

“The broad expectation is that the Bank of England will raise interest rates by 25 basis points, though some are now considering the possibility of a more aggressive 50 basis point move.

“It cannot be ignored that in recent weeks there has been a clear drive higher in UK inflation. Moreover, strong employment data should only add to the case for the BoE to lean more to the hawkish side in its communication.

Economist James Meadway, of the Progressive Economy Forum, argues that the UK is experiencing an “institutional, systemic failure”, and that the Bank would be wrong to raise interest rates today.

Last year’s inflation shock was triggered by Russia’s invasion of Ukraine, forcing up energy and food prices, which are now rippling through the economic system.

Higher interest rates in the UK didn’t make wholesale gas, for example, any cheaper, but the Bank argues that it must stop inflationary expectations becoming embedded.

Yesterday’s inflation report showed that service sector inflation accelerated in May, which will have alarmed the BoE.

There’s just an hour to go until the Bank of England reveals this month’s decision on UK interest rates.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, says BoE policymakers are stuck in an uncomfortable platform -- inflation staying hot and sticky, but previous rate rises haven’t yet had their full effect

That’s because monetary policy famously acts with a lag, partly due to the prevelance of fixed-term mortgages.

Streeter explains:

The cumulative effect of the rapid tightening in monetary policy over the past year, hasn’t yet been felt by a big chunk of homeowners and businesses as they’ve not had to refinance their debt.

So, many wealthier consumers will have been propped up by savings built up during the pandemic, with money in accounts gaining in interest. For them, big spending has been a post-pandemic habit hard to break, which is likely to be part of the reason why companies are still enjoying fatter margins, not yet beaten down by a bulk of cash strapped shoppers.

A fast train of realisation is set to hit that budgets are set for a big squeeze as refinancing costs escalate, and deadlines loom for a large span of borrowers. The cost-of-living crisis hit lower income families hard first, whose spend bigger chunks of their income on essentials, but now we are arriving at a stop where many wealthier households will feel their budgets being sideswiped.

Here’s a clip of shadow chancellor Rachel Reeves outlining Labour’s proposals to protect mortgage-holders who are struggling to cope with higher interest rates:

Reeves has also ruled out backing plans that would see subsidies or financial support for mortgage holders – a proposal pushed by the Liberal Democrats, but opposed by the government

She told BBC Radio 4’s Today programme.

“I recognise the challenge of inflation, and a big fiscal injection of cash into the economy, especially an untargeted injection, would not be the right approach.

Chancellor Jeremy Hunt made a similar argument earlier this week.

Following the latest economic data, the Bank of England is likely to continue raising interest rates at noon today, says Dr Luciano Rispoli, Senior Lecturer in Economics at the University of Surrey.

Dr Rispoli says:

This is because of higher-than-expected CPI inflation and positive monthly GDP readings.

But the burning question is by how much will the BoE increase interest rates?

Dr Rispoli predicts the Bank will resist lifting interest rates by half a percentage point – as some in the City expect – and stick with a smaller, quarter-point rise. That’s because the Bank doesn’t want to weaken the economy:

In fact, while it is true that inflation remains elevated, increasing the Bank Rate by 0.5% would increase mortgage rates/costs further, with a depressing effect on an already bearish housing market.

“Apart from economic data, I believe the Bank of England will also consider the recent ‘hiking pause’ of the Federal Reserve and the continued ‘hiking cycle’ of the European Central Bank. In this setting, I believe increasing the base rate by 0.25% seems the right compromise between tackling inflation and avoiding depressing an already fragile economy with higher interest rates.

Ocado shares soar on takeover talk

Online grocer Ocado is defying today’s gloom, with its shares soaring over 40% as takeover speculation grips the City.

The Times reports this morning that “speculation of bid interest from more than one American suitor” lifted Ocado’s share price yesterday.

“The talk was that technology heavyweights such as Amazon were pondering the merits of an £8-a-share move,” The Times added.

And this morning, Ocado’s shares have rocketed to 608p from 430p last night, to its highest level since late February.

Ocado’s shares have been languishing since they surged to £29 early in the pandemic, as home shopping demand jumped.

Victoria Scholar, Head of Investment at interactive investor, says:

Ocado has fallen out of favour with investors lately, trading down 40% over the past 12 months even after today’s jump, attracting potential opportunistic interest from parties looking to pounce on its depressed share price.

It was a stay-at-home stock market winner during the pandemic with shares surging in 2020, however the economic reopening ever since has prompted a downward trendline to emerge with many investors unwinding their holdings.

Ocado have declined to comment on the share price move, as have Amazon…

There’s a gloomy mood in the City of London today, ahead of the Bank of England’s interest rate decision at noon.

The FTSE 100 index of blue-chip shares has hit its lowest level since the start of June, curently down 60 points or 0.8% at 7498 points.

AJ Bell head of financial analysis Danni Hewson says fears that higher interest rates will hurt the economy are weighing on stocks:

“For markets the cure of higher interest rates could be worse than the disease of high inflation amid speculation a 50-basis point rise could be in the offing. Hawkish rhetoric from the US Federal Reserve is also doing little for sentiment.

“Inflation is proving more stubborn than expected in the UK and the brains trust in Threadneedle Street seem to have little answer other than employing the blunt instrument of rate hikes to try and bring things under control.

More than half of the public thinks the UK is currently in a recession, a poll has found.

Officially, the UK avoided a technical recession over the winter, with modest growth of just 0.1% in the October-December and January-March quarters.

But, some 61% of people told pollster Ipsos they thought the UK was in recession.

And who can blame them? Growth of just 0.1% doesn’t feel much different to a contraction of 0.1%, and the cost of living crisis is inflicting economic pain on many households.

PA Media have more details:

The poll suggests widespread economic pessimism amid rising interest rates and stubbornly high inflation, with two-thirds of people saying they expect both inflation and interest rates to increase in the next six months.

The figures are a slight improvement on those found by a similar poll in May, when 81% of people said they expected the cost of food would increase, but they continue to suggest significant negativity about the state of the economy.

Expectations for 2024 are similarly low. Some 71% of people told Ipsos they expected the cost of their weekly food shop to increase next year, while 66% said they thought utility bills would rise.

Britain’s “red-hot inflation” has opened the door to a large, half-point increase in UK interest rates today, which would be the first since February, Bloomberg points out.

Bank could be split over rate decision

Today’s interest rate decision is unlikely to be unanimous, when it’s announced at noon.

There are nine policymakers on the Bank of England’s monetary policy committee, and they have a range of view of the path of inflation and the economy.

Last month, the MPC split by 7–2 when they voted to increase Bank Rate by 0.25 percentage points, to 4.5%.

Two policymakers, Swati Dhingra and Silvana Tenreyro, opposed that move, arguing that previous rate rises had not yet had their full effect, and that inflation would fall sharply this year.

Tenreyro (in her last meeting at the MPC) and Dhingra could be the least likely to support a rate rise today (but you never know, given recent inflation shocks….).

Other, more hawkish, MPC members may favour a large increase in borrowing costs.

Tomasz Wieladek, chief European economist at U.S investment firm T. Rowe Price, predicts that at least three of the Monetary Policy Committee’s nine members will vote for a half-point hike today.

Wieladek adds:

“I think it’s a very finely balanced decision.”

Matthew Ryan, head of market strategy at global financial services firm Ebury, agrees that some MPC members will push for a half-point increase:

“The BoE has been backed into a corner, and will have no choice but to continue raising interest rates aggressively in the coming meetings.

We now think that one, or perhaps even both, of members Dhingra and Tenreyro will vote for an immediate hike on Thursday, having opted for no change at the past few MPC meetings.

We could also see a handful of votes in support of an even larger rate increase, and a 50bp hike is now a very realistic possibility.

Steve Matthews, liquidity fund manager at Canada Life Asset Management, expects the Bank of England to raise its Base Rate by 25bps to 4.75% today, resisting the option of a larger 50-basis point hike to 5%.

But further rate rises are also coming, Matthews warns:

“Markets are pricing in five further hikes before the end of the year with speculation that there is scope for a 50bps rise somewhere along the way.

On balance, we expect the BoE to raise its Base Rate by 25bp on Thursday to take it to 4.75% and subsequent hikes in August and September to take the rate to 5.25% in the event that the economy does not rapidly cool over the summer.”

UK mortgage rates rise again

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.

"The plank of England" - what the papers say about interest rates

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.”

Updated

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.

Updated

Rachel Reeves: inflation is incredibly concerning

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.

Updated

Sunak sticking with goal of halving inflation

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.”

Updated

Cleverly pushes back against recession calls

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.

Updated

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.

Updated

Rate decision is 52:48....

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.

The odds of UK interest rate increases in June 2023

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 …

Updated

Bean: Brexit is pushing up inflation

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.

Updated

Sir Charlie Bean: I'd vote for a half-point hike

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.

Updated

Introduction: Another Bank of England rate rise looms

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

Updated

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