Will we get a 100bps rate rise?

Market experts are expecting a 100-basis point increase in the next Bank of England (BoE) base rate decision, with interest rates projected to rise to 5.7% by June next year.

This means that the bank’s Monetary Policy Committee (MPC) could hike the current 2.25% base rate to 3.25% during its November 3 meeting in an effort to control near four-decade high inflation in the UK. The last time the central bank raised the base rate by as much as 1% was in July 1988.

The Liz Truss-Kwasi Kwarteng mini budget a couple of weeks ago sent the pound plunging at one point to an all-time low against the US dollar. As a response to the weakening pound, the UK’s central bank said that it would not hesitate to change interest rates, and some expected an emergency rate rise would be decided before the next scheduled policy announcement.

The emergency rate increase did not happen – instead, the BoE decided to purchase long-dated UK government bonds to “restore orderly market conditions” and prevent a “material risk to UK financial stability.”

Read more: The Bank of England was right to intervene - experts.

However, the BoE is expected to “make big moves” in November and December, with the base rate now seen peaking much higher, according to a Reuters poll. When 36 economists were asked what the BoE should do in November, the median response was to raise by 100 basis points.

“The MPC is setting monetary policy to ensure that CPI inflation will return to the 2% target in the medium term,” Dave Ramsden, BoE deputy governor for markets and banking, said during Friday’s Securities Industry Conference. “Monetary policy is also acting to ensure that longer-term inflation expectations are anchored at the 2% target.”

The MPC started to tighten monetary policy in December 2021, raising the bank rate from 0.1% to 0.25%. The rate has been increased at every MPC meeting since then and was raised by 0.5% at both the August and September meetings, to its current level of 2.25%.

Ramsden, who is also a member of the MPC, said he voted for a 0.75% increase to 2.5% at the September 2022 meeting, pointing out that the recent data outturns had already registered more persistent inflationary pressures and that medium-term measures of inflation expectations remained high.

“In my view, a faster policy tightening at the last MPC meeting would have helped to bring inflation back to the 2% target sustainably in the medium term and would reduce the risks of a more extended and costly tightening later,” the BoE deputy governor added.

“Our November decision and latest forecasts will be published in just under four weeks’ time. In the intervening period we will be seeking answers to a range of questions to inform our assessment of how quickly inflation will return to target in the medium term.”

Ramsden noted that the MPC was clear in its language in September that should the outlook suggest more persistent inflationary pressures, including from stronger demand, it would respond “forcefully as necessary.”

Read more: Bank of England forced to act suddenly on ‘material risk’ to economy.

“These are very challenging times for the UK economy and millions of households and businesses are experiencing real hardship as a result of the cost-of-living crisis,” he said. “However difficult the consequences might be for the economy, the MPC must stay the course and set monetary policy to return inflation to achieve the 2% target sustainably in the medium term.”

Gaurav Shukla, mortgage adviser at London-based broker Home Me, commented that although rates increased at the beginning of September, they were still affordable for most customers, so it was business as usual. Today, he added, it is no longer business as usual.

“In fact, in the property market, it is officially now business as unusual,” Shukla stressed. “There is extraordinary uncertainty among the UK’s leading lenders and a lack of confidence across the board after the mini budget.

“Expect the Bank of England to continue to raise the base rate over the coming months and into 2023, with rates reaching their peak around the second or third quarters of next year. I expect house prices to drop over the coming year, with a much-needed market correction.

Lewis Shaw, founder of Mansfield-based Shaw Financial Services, believes that unless there is significant intervention from both the Bank of England and the government, it’s a certainty that house prices will start to fall.

“With mortgage rates reaching new highs not seen for over a generation and signs they could move higher, the impact on buying power is stark,” he said.

Graham Cox, founder of the Bristol-based broker SelfEmployedMortgageHub.com, also remarked that the property market has undergone a seismic shift in the past couple of weeks.

“Even though the Bank of England base rate is still only 2.25%, mortgage rates are now at least double that in most cases, often 5% plus,” he expounded. “Unless the government steps in yet again, I think there will be a flood of forced sellers very soon, as homeowners realise just how much mortgage payments will be going up and panic sets in. At this point, I only see house prices falling significantly in 2023 and beyond.”