Fears as base rate ‘to hit 2% by September’

THE Bank of England is set to raise interest rates this week and could double the benchmark to 2 per cent by September.

The base rate is expected to increase from 1 per cent to 1.25 per cent on Thursday, although some believe the rise could be even higher – to 1.5 per cent.

The hike will set the scene for a series of rate rises this summer in a fresh blow to family finances.

Any increase this week – the fifth in six months – would be the steepest run of rate rises in 25 years.

If the rate hits 2 per cent in the autumn, this would add £87 a month to a typical £150,000 mortgage and £146 to a £250,000 home loan.

Higher mortgage costs would be painful for millions already grappling with the rising price of essentials including food, fuel and energy bills, as well as higher taxes.

Analysts have warned ‘the era of cheap money is coming to an end’

in what will be a ‘big body blow’ to many families with mortgages.

It is also feared that rising interest rates – at a time of soaring prices and higher taxes – could tip the economy into recession.

Boris Johnson has been urged to cut taxes to ease the pressure on family finances, boost business and the economy – and save his job.

The BoE’s handling of the economy has also come under fire in recent months as inflation soars above its 2 per cent target.

With prices rising around the world, UK inflation is running at a 40-year high of 9 per cent and is expected to top 10 per cent later this year.

The news will come as a shock to millions who have, until recently, enjoyed cheap borrowing costs.

Before a spate of recent rises, rates were so low for so long that some ten million Britons had never seen increases above 1 per cent.

Laith Khalaf, head of investment analysis at AJ Bell, said: ‘The era of cheap money is coming to an end, and it looks like it’s going to be a painful goodbye for many of us.’

For rates to reach 2 per cent in September, the BoE will need to embark on larger increases than the normal 0.25 percentage point hikes.

That is because there are only three meetings of the rate-setting

Monetary Policy Committee (MPC) between now and then – this week, in August and in September.

As such, economists expect two rate hikes of 0.25 percentage points and one of 0.5 percentage points – or 50 basis points in City lingo.

That would be the biggest increase since the Bank gained independence in 1997.

Paul Dales, chief UK economist at Capital Economics, said: ‘The Bank of England will raise interest rates by 50 basis points on Thursday. Even if we’re wrong – it is a very close call – recent developments support our view that rates will rise

to a peak of 3 per cent next year.’