Bank expected to hike interest rates again despite inflation easing

The Bank of England is expected to push interest rates even higher on Thursday despite data showing inflation eased back by more than predicted in November.

In what will heap further pressure on mortgage holders, the nine members of the Monetary Policy Committee (MPC) will make a decision that could push up the amount that millions of borrowers have to pay their banks every month.

Economists expect that the MPC will vote to increase the Bank’s base interest rate from 3% to 3.5% in December, to its highest for more than 14 years.

It would represent a slight cooling in rate increases, after the Bank’s MPC opted for a 0.75 percentage point rise last month – the highest single increase since 1989.

It will also be the ninth time in a row that the Bank hikes interest rates. Less than a year ago the rate was 0.1%.

The decision comes after official figures on Wednesday showed inflation eased back by more than expected, to 10.7% in November from October’s 41-year high of 11.1%.

While encouraging, economists believe it will not be enough to stay the Bank’s hand in the face of mounting inflationary pressures – in particular as wages continue to rise.

Data earlier this week showed regular pay, excluding bonuses, rose by 6.1% in the three months to October – a record outside of the pandemic – as firms are under increasing pressure to increase earnings.

But wages continued to be outstripped by rising prices, falling by 3.9% after Consumer Prices Index inflation was taken into account.

Sandra Horsfield at Investec Economics said: “Against the backdrop of tight labour markets and high wage demands, there is still a long way to go before the all-clear on inflation can be sounded.

“We anticipate the Bank of England to raise the Bank rate once again when it announces its policy decision on Thursday, but at a slower pace of 50 basis points, to 3.5%.”

The Governor of the Bank of England Andrew Bailey sought to cool market expectations for how high interest rates would ultimately increase at the previous meeting, amid improvements in the value of the pound and government borrowing rates since September.

Deutsche Bank has suggested that rates could push as high as 4.5% next year, drifting from 5.25% signalled by the Bank itself last month.

But experts at ING and Investec have been even more dovish, both predicting that the rate will peak at 4% next year.

ING’s James Smith, Antoine Bouvet and Chris Turner said in a note to investors: “When the Bank of England hiked by 75 basis points for the first time back in November, it seemed obvious that it would be a one-off move.

“The forecasts released back then suggested that keeping rates at 3% would see inflation overshoot (just) in two years, while raising them to 5% would see an undershoot.

“In other words, we should expect something somewhere in the middle, and that’s why we think Bank Rate is likely to peak at 4% early next year.”

They predicted that interest rate hikes could stop in February but suggested that continued wage pressures in the labour market meant the Bank could be “less swift to cut rates than the US Federal Reserve”.

Ms Horsfield said that with falling inflation and the UK likely to be deep in a recession throughout 2023, “such a trajectory should allow room for the Bank to start cutting rates again towards the end of 2023, even if inflation is still above target at that point”.