Experts predict rates rise to help curb inflation

Get set for a rates rise to help curb inflation: Experts predict leap to 0.5% by March in blow to homeowners

  • The Bank of England is expected to raise rates from 0.1 per cent to 0.25 per cent in December and then to 0.5 per cent in March in a battle to tame inflation
  • This would tighten the squeeze on millions of families with variable mortgages and other loans amid soaring energy bills
  • But economists are concerned that inflation could rocket over winter if the Bank takes no action
  • In the UK, wages are also being pushed higher by a dearth of qualified staff for roles such as lorry drivers, health workers and hospitality roles 

Families face an interest rate rise before Christmas as wages jump and the cost of living threatens to spiral out of control, experts warned yesterday.

The Bank of England is expected to raise rates from 0.1 per cent to 0.25 per cent in December and then to 0.5 per cent in March in a battle to tame inflation.

Such a move would tighten the squeeze on millions of families with variable mortgages and other loans, when they are already coping with soaring energy bills.

But economists are becoming increasingly worried that inflation, or rises in the cost of living, could rocket over winter if the Bank takes no action.

The International Monetary Fund (IMF) said central banks must be ‘very, very vigilant’ about the threat posed by rising prices. 

They are being pushed higher by staff shortages, an energy crisis and rising materials costs.

The Bank of England is expected to raise rates from 0.1 per cent to 0.25 per cent in December and then to 0.5 per cent in March in a battle to tame inflation

Wages in September surged 6 per cent year-on-year, fresh data from the Office for National Statistics (ONS) revealed, as employers desperately competing for staff threw more money at candidates to lure them in. 

Hours after the figures emerged, the IMF became the latest organisation to warn about inflation, singling out the UK and US as the two developed economies most at risk of seeing prices spiral.

In the UK, wages are also being pushed higher by a dearth of qualified staff for roles such as lorry drivers, health workers and hospitality roles. 

This could prompt the Bank of England’s nine-strong Monetary Policy Committee (MPC) to increase rates when it meets in December, economists predict.

Paul Dales, chief UK economist at consultancy Capital Economics, said: ‘We now think shortages will be an issue until at least the middle of 2022. 

And as they appear to be boosting underlying wage growth, they add to the risks that the MPC will raise interest rates before our forecast of May 2022.’

Laith Khalaf, head of analysis at investment platform AJ Bell, said: ‘The market has been rapidly pricing-in an interest rate rise in recent weeks, with the chances of a hike this year now standing at two in three.

‘The Bank of England is expecting elevated inflation this winter, but the recent spike in gas and oil prices will test their resolve, as the increasing cost of these vital economic inputs will mean that inflation will be higher, and potentially longer lasting. 

The UK now looks firmly on the path to higher interest rates. The question is how quickly the central bank takes us there.’ 

The Bank slashed rates to 0.1 per cent last year to encourage spending, rather than saving, during the Covid slump.

But as inflation is now going up, officials are faced with a quandary – whether they should raise rates to bring prices down, at the risk of halting the UK’s already slowing recovery. 

Laith Khalaf, head of analysis at investment platform AJ Bell, said: ‘The market has been rapidly pricing-in an interest rate rise in recent weeks, with the chances of a hike this year now standing at two in three.’

Investors think the Bank may be forced into a rate rise to 0.25 per cent as early as December – around a year earlier than first expected.

The Bank has so far held off lifting rates, as officials were adamant that price rises would only be temporary until issues of the pandemic affecting the economy worked their way out. 

But it said sustained rises in wages would be troubling, as this could make inflation more persistent.

Some of the 6 per cent jump in salaries indicated by the ONS can be ignored, the statistics body explained, as today’s wages are being compared to a period of lower pay last year when millions of staff were still on furlough.

But even so, the ONS thinks wages have still climbed by between 4.1 per cent and 5.6 per cent even ignoring these factors.

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