The Daily Telegraph

Investors bet on interest rates hitting 3.75pc by 2023

- By Szu Ping Chan, James Warrington and Melissa Lawford

INVESTORS are betting that interest rates will hit 3.75pc by the end of the year as the Bank of England battles to contain inflation.

The Bank is now expected to lift rates by 0.75 percentage points tomorrow, taking them to 2.5pc in the biggest rise since Black Wednesday in 1992, when ministers increased borrowing costs by two percentage points in a doomed attempt to avoid a collapse in sterling.

Traders are also pricing in 2 percentage points of rises over the next three meetings, implying that rates will jump from the current rate of 1.75pc to 3.75pc, their highest level since 2008.

Economists said the Bank had to act to control inflation, which stood at 9.9pc in August and is expected to climb back above double digits this autumn.

Sam Lynton-brown, of BNP Paribas, said: “We find arguments for a 75bp rate hike compelling.”

He added that Liz Truss’s plan to slash taxes and cap energy bills meant the Bank was more likely to retain its hawkish guidance” and keep rates higher for longer.

Mr Lynton-brown said: “The energy price cap introduces potentiall­y unlimited fiscal liabilitie­s at the same time as tax cuts reduce government income.

“If nothing else, the new Prime Minister is delivering on her intention of ‘challengin­g the Treasury orthodoxy’.”

The prediction comes as the European Central Bank and Federal Reserve step up the pace of their own rate rises in a bid to control surging inflation, even as several economies are expected to be plunged into recession.

Smaller central banks have also raised interest rates in a bid to control price rises, with the Philippine­s, South Africa and Switzerlan­d expected to lift borrowing costs over the next few days.

Sweden’s Riksbank increased rates by one percentage point yesterday, its most aggressive tightening in almost three decades of inflation targeting.

Big rate rises are expected to add £2,200 to the average mortgage bill over two years compared with people who took out deals last month, according to Hamptons estate agents.

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