Interest rates are expected to rise to 3.75% by the end of the year

Investors are betting interest rates will hit 3.75% by the end of the year as the Bank of England struggles to contain inflation.

JThe Bank is now expected to raise rates by 0.75 percentage points on Thursday, taking them to 2.5% in the biggest increase since Black Wednesday in 1992, when the government raised borrowing costs by two percentage points in a futile attempt to avoid a collapse of the pound sterling.

Traders are also forecasting 2 percentage point hikes over the next three meetings, implying rates will rise from the current rate of 1.75% to 3.75%, their highest level since 2008.

Economists said the Bank needed to act to control inflation, which stood at 9.9% in August and is expected to climb back above double digits this fall.

Sam Lynton Brown of BNP Paribas said: “We find the case for a 75 basis point rate hike compelling.

He added that Liz Truss’ plan to cut taxes and cap energy bills meant the Bank was more likely to stick to its hawkish stance “and keep rates higher for longer.

Mr Lynton Brown said: “Capping energy prices introduces potentially unlimited fiscal liabilities at the same time as tax cuts reduce government revenue.

“If nothing else, the new prime minister is realizing his intention to ‘challenge the orthodoxy of the Treasury’.”

The prediction comes as the European Central Bank and Federal Reserve are accelerating the pace of their own rate hikes in a bid to control soaring inflation, just as several economies are set to plunge into recession.

Smaller central banks have also hiked interest rates in a bid to control rising prices, with the Philippines, South Africa and Switzerland also expected to raise borrowing costs in the coming days.

Sweden’s Riksbank unexpectedly hiked rates by a full percentage point on Tuesday, its most aggressive tightening in nearly three decades of inflation targeting.

Sharp rate hikes are expected to add £2,200 to the average two-year mortgage bill compared to people who made deals last month. Assuming that a 0.75 point increase directly affects mortgage rates, the average rate for a two-year fixed mortgage will rise to 4.67% from 3.92% in August.

It means a buyer buying an average house in London would face a monthly mortgage bill of £2,240 – £169 more than if they had received a mortgage offer in August, according to an analysis by Hamptons estate agents .

Over the course of a two-year contract, that means they would have to pay an extra £4,056. Compared to if they had bought before interest rates started to rise in December 2021, the additional cost would be £14,304.

The average UK buyer would pay an additional £2,208 over two years, compared to if they received their offer in August, and an additional £7,800 compared to December 2021.

If the Bank Rate reaches 3.75% by the end of this year, the monthly mortgage bill for an average London property of £543,520 will be £2,537, a jump of 54% from s they had bought in December.

Over the life of a two-year solution they would spend an extra £21,432 than if they had taken out a mortgage deal a year earlier – and traders expect rates to continue to rise even further .

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