Interest rate set to reach 15-year high

INTEREST rates are set to be hiked to 4 per cent by the Bank of England on Thursday, further tightening the screws on borrowers.

Members of the Bank of England’s Monetary Policy Committee are expected to vote 7:2 for raising the base rate half a point in a bid to tame inflation. Although it fell slightly in December, inflation, as measured by the consumer price index, is currently 10.5 per cent, more than five times over the Bank’s official target.

If the MPC does vote to hike its base rate to 4 per cent, it would be the highest level since October 2008. Economists believe that with inflation falling, the economy holding up better than expected and the labour market easing, interest rates could peak at 4.5 per cent and the MPC may finish hiking by March.

“We expect a 50 basis point rate hike for the second consecutive meeting,” said ING developed markets economist James Smith.

“While the minutes of the MPC December meeting appeared to open the door to a potential downshift to a 25 basis point move in February – and this meeting looks like a closer call than markets are pricing – the reality is that the recent data has looked relatively hawkish.”

Bank of America UK economist Robert Wood said that with energy costs falling and the economy more resilient than expected, the Bank may say that the rate hiking cycle is near its peak: “We expect the Bank’s forecasts to leave open the possibility of the rate peaking lower than the 4.5 per cent priced by the market. But easier does not mean done.”