Interest rates are set to rise to over 3.5% next year, economists warn

Rate hike expected by 3.5%

Interest rates are set to rise to their highest level in 14 years, economists have warned (Image: Getty)

The Bank of England is expected to hike rates further next week, putting further pressure on mortgages.

The nine members of the monetary policy committee are set to make a decision in a tight meeting that could skyrocket the amount millions of mortgage holders have to pay their banks each month.

The decision is expected to raise the bank’s base rate to a 14-year high from 3% to 3.5% in December.

The expected 0.5 percent hike will mark a slight cooldown in rate hikes after the bank’s MPC opted for a 0.75 percentage point hike last month — the highest single hike since 1989.

The move will mark the ninth consecutive time the bank has raised interest rates. Less than a year ago, the rate was 0.1%.

Economists at Deutsche Bank said they expect the interest rate to rise to 3.5% at the meeting on Thursday, December 15, and predict that five of the committee’s nine members will opt for the hike.

‘Some good news on easing inflation expectations and easing recruitment difficulties will allow the MPC to slow the pace of tightening and avoid a second consecutive 75bps hike,’ they added.

“But the bank isn’t out of the woods yet.

‘Persistent inflationary pressures combined with continued tightness in the labor market should lead to another ‘huge’ increase.’

Andrew Bailey tried to tone down market expectations of how high interest rates will eventually rise in the last session as the value of the pound and government bond yields have improved since September.

Deutsche Bank has hinted rates could rise as high as 4.5% next year, down from the bank’s own earlier forecast of 5.25% last month.

However, experts at ING and Investec were even more cautious, both forecasting the rate to peak at 4% next year.

ING’s James Smith, Antoine Bouvet and Chris Turner said in a note to investors: “When the Bank of England rose 75 basis points for the first time in November, it seemed obvious that it would be a one-off move.

“The forecasts released at the time suggested that maintaining 3% inflation would (only) overshoot two years from now, while raising it to 5% would result in undershooting.

“In other words, we should expect somewhere in the middle, and that’s why we think policy rates are likely to peak at 4% early next year.”

They forecast rate hikes could stop in February, but hinted that ongoing wage pressures in the labor market could mean the bank is “less quick to cut rates than the US Federal Reserve”.

The Consumer Price Index (CPI) stood at 11.1% in October, marking the UK’s highest inflation rate in 45 years.

Although most analysts believe we have peaked and that the upcoming November numbers will show a slight decline in CPI, the late rise is expected to remain close to double digits at least until spring.

In its latest assessment, the Bank of England said any upcoming recession would be long but shallow.

Economist Paul Dales believes interest rates could stay above 4% throughout next year as the bank focuses on flushing inflation out of the system, the Guardian reports.

However, other economists are forecasting rate cuts as early as the spring to avoid a potential recession turning into a slump.[predictingratecutsasearlyasspringinordertoavoidanypotentialrecessionturningintoaslump[predictingratecutsasearlyasspringinordertoavoidanypotentialrecessionturningintoaslump

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Justin Scacco

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