Interest rates to hit 1.25pc by summer as prices spiral

HoUSEHolDS were last night warned that interest rates will hit their highest level for more than 13 years this summer.

as official figures showed wages and unemployment falling, analysts at HSBC said they expect rates to reach 1.25pc in august.

That would be the highest level since early 2009 and push up the cost of mortgages for millions of families.

The Bank of England has raised interest rates twice in recent weeks – from 0.1pc to 0.25pc in December and then to 0.5pc this month – as it steps up its battle against inflation.

inflation hit a 30-year high of 5.4pc in December and Bank officials now believe it will top 7pc in april as energy bills soar alongside the price of essentials from food to fuel.

The office for national Statistics will publish inflation figures for January today.

in a separate report yesterday, it said unemployment fell back below pre-pandemic levels to 3.9pc in December while pay rose by 6.3pc in January. There are also a record 1.3m job vacancies, with many firms having to ramp up pay in order to secure staff, fuelling fears of a ‘wageprice spiral’ that could push inflation out of control and derail the economy.

HSBC is now forecasting that interest rates will rise again in march, may and august, taking them from 0.5pc to 0.75pc, then 1pc, and then 1.25pc.

Capital Economics said rates could then hit 2pc next year.

Paul Dales, chief UK economist at Capital Economics, said: ‘The unemployment rate has fallen to pre-Covid levels, job vacancies are at a record high and wage growth is rising.

‘That’s a recipe for more interest rate hikes, perhaps from 0.5pc now to 1.25pc this year and to 2pc next year.’

Bank Governor andrew Bailey drew criticism from unions and a rebuff from Downing Street this month when he said workers should rein in pay demands or risk a wage-inflation spiral.