City traders were today betting that interest rates will have to rise at least twice more and are likely to hit 5% to bring rampant inflation back under control.
Today’s disappointingly small drop in the official rate of inflation — the Consumer Price Index (CPI) — to 10.1% in March sent economists scrambling to revise their forecasts for the rest of the year.
They fear it is increasingly unlikely that the cost of borrowing will peak at 4.5% — as the Bank of England Governor Andrew Bailey had hoped — and further rises to 4.75% or beyond will be necessary.
The Bank has an official target of 2% — a rate not achieved since July 2021 — and Rishi Sunak had pledged to halve the rate of inflation by the end of the year. Today financial markets were indicating they believe another rate hike in May to 4.5% is a near-certainty.
However they are now for the first time almost equally confident that a further rise to 4.75% is inevitable at the June meeting of the Bank’s Monetary Policy Committee.
Yet another upward move to 5% is now seen as more likely than not at the August meeting with a one-in-four chance of 5.25% being hit by the Autumn.
Further rises on this scale would have major knock-on implications for economic growth, increasing the risk of a recession, and hurting house prices as mortgage rates rise again.
Fixed mortgages rates have been drifting down since the autumn but now look likely to start rising again adding to the pressure on homeowners.
Those on tracker rates will see immediate increases in their bills. Danni Hewson, head of financial analysis at broker AJ Bell, said: “Once again, expectations that UK inflation would finally fall to single digits for the first time since last summer have been dashed.
“The rate that prices are rising has come down a touch but remains stubbornly high at 10.1%, which raises big questions about how much more work the Bank of England has to do. Reacting to today’s figures, markets are now pricing in at least two further hikes, taking interest rates up to 4.75%, and are split on whether central bankers will need to go even further after that crucial core inflation number remained stubbornly static.
Matthew Ryan, head of market strategy at financial services firm Ebury, said: “On the one hand, sticky inflation raises the possibility that the UK economy could tip into a technical recession in 2023. On the other, it more or less guarantees that the Bank of England still has a little way to go in raising interest rates.
“We see another 25bp hike at the May MPC meeting as a foregone conclusion, and we wouldn’t be at all surprised to see another couple more hikes beyond next month’s meeting.”
