Bank of England on the Fence Over Another Interest Rate Hike Amid Falling Inflation


The financial world is divided over the prospect of another jump in interest rates this Thursday following a surprising deceleration in the rate of price inflations. Initial projections foresaw a 15th consecutive hike to 5.5% from 5.25%, but recent data indicating a plunge in inflation rates to 6.7% for the year ending in August caused a shift in expectations. As it stands, only about half of investors remain confident in the increase.

The Bank of England, responsible for setting the rates, is set to unveil its decision shortly after noon. If it tilts towards a rise, this could signify escalated interest rates on certain mortgages and loans, while simultaneously boosting the savings rates. Since December 2021, the Bank has been steadily rolling rates uphill in a bid to contain UK’s unusual skyrocketing inflation that’s currently straining household finances.

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This strategy renders borrowing more costly, thereby encouraging frugality among households. It also brings the possible result of firms having to raise their prices at a slower pace. However, this strategy is a delicate balancing game. Overzealous interest rate increases could potentially lead households to drastically cut down on their spending, potentially bringing about firm failures and a deceleration of economic growth.

The U.S. Federal Reserve, for its part, held rates stable at between 5.25% and 5.5% on Wednesday, while it gauges whether adequate measures have been taken to counter inflation. On another front, Goldman Sachs, a premier investment bank, expressed its belief that UK’s interest rates will hold steady this Thursday following revelations of falling inflation.

Yet, certain economists maintain that with inflation rates still at 6.7%, considerably exceeding the Bank of England’s 2% target, the probability of another surge in rates may not be entirely dismissible.

The ripple effects of rising interest rates will be felt differently by individuals. Those with variable or tracker mortgages, or those gunning for new fixed-rate deals, will be most affected, as the cost of borrowing money for their homes will spike. A leap from 5.25% to 5.5%, for instance, might saddle those with an average tracker mortgage with about £26 in additional monthly payments. Those with SVR mortgages may have to grapple with an extra £14.50, according to UK Finance.

Even in the absence of another hike, when compared to December 2021, tracker mortgage holders are now being charged an extra £540 each month or an additional £299 on an SVR. However, about three-quarters of mortgage holders—those on fixed-rate deals—have been cushioned from the prevailing interest rates increases.

Still, nearly 800,000 deals will wrap up by year’s end, with an additional 1.6 million expected to reach their terms next year. In addition to mortgages, the Bank of England’s rates also impact what’s charged on credit cards, bank loans, and car loans. If lenders anticipate higher interest rates, they may preemptively raise their prices. On the upside, savers could benefit from more lucrative returns. From the government’s standpoint, however, a raise in rates translates to higher interest payments on the country’s debt.