Borrowers hit hard in bid to curb inflation

BORROWERS are set to come under increased pressure, as the Bank of England is expected to raise its base rate by 0.25 points to 1.25 per cent on Thursday.

Economists believe that the Bank’s nine-member Monetary Policy Committee (MPC) will vote unanimously to increase its base rate in a bid to tame surging inflation. A higher base rate will lead to increased borrowing costs for consumers, as lenders will raise their rates on mortgages, loans and other forms of credit.

With inflation hitting firms and households, Barclays economists Fabrice Montagne and Abbas Khan said that the MPC is likely to raise its base rate on Thursday to 1.25 per cent and then hike it again to 1.5 per cent at its next meeting in August before pausing, to see what effect it is having on the economy.

They said: “The MPC will hike rates to 1.5 per cent in August and pause. By then, tailwinds from the Covid recovery will have faded while headwinds from the cost-of-living crisis will have only intensified further.

“The impact of past tightening will also become visible.”

Gabriella Dickens, senior UK economist at Pantheon, agreed and said that the MPC will keep its base rate on hold after August’s expected increase, as a recovery in the workforce eases recruitment problems, helping to keep a lid on wage growth and inflation.

“The MPC’S fears about CPI inflation exceeding the 2 per cent medium term target should start to fade towards the end of this year, enabling them to place more weight on the weakness in economic activity,” she said.

“Accordingly, we expect the MPC to end its tightening cycle once the base rate has reached 1.5 per cent – much earlier than markets currently expect.”

However, Capital Economics’ chief UK economist Paul Dales said that with the tightening of the labour market, meaning an economy close to full employment and upwards pressure on wages, he would not be surprised if the MPC surprised the market by hiking to 1.5 per cent on Thursday.

“It is a very close call,” he said. “But our hunch is that the recent loosening in fiscal policy, the latest tightening in the labour market and further signs of rising price and wage expectations will just about tip the balance to a 50bps hike.”

On Monday, the Office for National Statistics is expected to say that the economy grew by just 0.1 per cent in April, while the following day, it is tipped to report that average earnings growth has fallen from 4.2 per cent to 4 per cent.