Bank of England set to hike interest rates to new 13-year high
The Bank of England is set to raise interest rates for the fifth consecutive time, but experts warn any hesitation could contribute to higher petrol prices for busy British drivers.
The Bank of England is expected to raise its key rate by 1%, already the highest in 13 years, to 1.25%.
It would be the first time since January 2009 that the rate would be above 1%.
The nine-person Monetary Policy Committee (MPC), which sets the rate, will announce its decision on Thursday.
They will want to contain inflation, which is at levels not seen in decades.
“The Bank of England faces a severe test of its mettle in the next interest rate decision, and any hesitation is likely to see the pound punished in the foreign exchange markets,” said Laith Khalaf, chief executive. of investment analysis, AJ Bell.
Such a drop would mean that the price of petrol and diesel, and other imports that the UK pays in dollars, would rise.
This month the average deposit price for a family car topped £100 for the first time.
Any extra jump is unlikely to be welcomed by drivers.
There are many signs that the Bank could raise rates.
The MPC has voted for an increase at each of the last four meetings, in December, February, March and May.
Last time, three of the nine members of the monetary policy committee already voted for rates set at 1.25%.
However, some things have changed since then. Britain’s economy appears to be struggling, with an OECD forecast predicting it will be the weakest in the Group of Seven (G7) next year.
“By raising interest rates, the Bank is putting the brakes on an economy that is already slowing down on its own.
“It risks stagnating the economy, or worse, backtracking.” said Mr. Khalaf.
The Bank has been given a bit more leeway by the Chancellor, who is expected to funnel billions to struggling households to help them cope with rising energy bills.
A rise in interest rates will eat away at some of this handout, as the cost of borrowing will rise for homeowners.
But drivers would also suffer if rates were maintained and savers would benefit from a hike.
People are certainly expecting increases. According to a survey commissioned by the Bank of England and carried out by Ipsos in early May, 70% of people expect rates to rise over the next 12 months.
The survey, released on Friday, showed 28% thought a rate hike would be good for the economy, 22% said the same about a cut and 28% want them to stay at current levels. .
Some in the market also believe the Bank could go further than the 1.25% hike and cut rates straight to 1.5% or a 50 basis point (bp) hike.
“Markets continue to price in the likelihood of a 50 basis point hike,” JP Morgan’s Allan Monks said.
“We believe there is a plausible outside chance that this will be delivered next week.
“But we continue to believe that the MPC will stick to frequent 25 basis point steps as it remains concerned about the recession as well as inflation risks and tries to find a narrow path forward that is cognizant of the of them.”
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