(UK) – Market uncertainty prevails as investors grapple with divergent predictions ahead of the Bank of England’s interest rate decision, scheduled for Thursday.
Previously, a 15th consecutive rate hike, taking the rate from 5.25% to 5.5%, had been widely anticipated, but now only half of investors are sticking with this forecast.
This shift in expectations came in response to an unexpected slowdown in inflation figures, which measure the rate of price increases, showing a drop to 6.7% in the year leading up to August.
The Bank of England, responsible for setting interest rates, will unveil its verdict at midday. Should the rates rise, it would result in higher interest expenses on various mortgages and loans, while also providing an uplift in savings rates.
UK faces delicate interest rate decision
Since December 2021, the Bank has been gradually increasing rates in a bid to combat the elevated levels of inflation prevailing in the UK, which have placed significant financial strain on households.
By raising the cost of borrowing, the central bank hopes to encourage consumers to reduce their spending, thereby curbing inflation. Additionally, this approach may prompt businesses to slow down price hikes.
Nonetheless, this endeavor represents a precarious balancing act, as overly aggressive rate hikes could lead to decreased household spending, potentially placing businesses in jeopardy and slowing economic growth.
In a parallel development, the US Federal Reserve, on Wednesday, opted to maintain its rates at the 5.25%-5.5% range, indicating its own ongoing efforts to address inflation.
Investment banking giant Goldman Sachs has now altered its prediction, forecasting that UK interest rates will remain unchanged following the surprising inflation dip.
However, other economists contend that with inflation still at 6.7%, substantially exceeding the Bank of England’s 2% target, another rate hike could be in the cards.
The repercussions of higher interest rates are variable, affecting individuals in different ways. Those holding variable or tracker mortgages, or those seeking new fixed-rate deals, will encounter increased borrowing costs for their homes.
A rise from 5.25% to 5.5% would translate to an additional monthly cost of around £26 for typical tracker mortgage holders, while those with standard variable rate (SVR) mortgages could face a £14.50 increase, as estimated by UK Finance.
Even in the absence of a rate adjustment, tracker mortgage holders are already paying £540 more per month compared to December 2021, with SVR mortgage holders paying an extra £299 per month.
However, the majority of homeowners, constituting three-quarters of this demographic, are on fixed-rate mortgage deals, shielding them from the current wave of interest rate hikes.
About 800,000 such deals are set to conclude by the end of this year, with an additional 1.6 million slated to mature next year.
Bank of England interest rates also influence the interest charges on credit cards, bank loans, and car loans. Lenders may choose to raise rates if they anticipate higher future interest rates.
Conversely, individuals with savings should experience improved returns on their investments.
From the government’s perspective, an increase in rates leads to higher interest payments on the nation’s debt, with far-reaching fiscal implications.