UK interest rate set to hit 1% by summer, City says


Today it looks very likely that UK interest will rise next week in the first consecutive rate hike since 2004. Economists expect rates to rise next perhaps three times more this year, reaching up to 1% by the summer.

The Bank of England raised rates in December from 0.1% to 0.25%. The City believe they will drop to 0.5% when the monetary policy committee meets on Thursday.

Then from there to 1.25%, in stages.

Will it be bad for the economy?

The Bank hopes that gradual increases will give businesses and households time to plan. Interest rates have been terribly low for a very long time because we have been through one crisis or another. Going back to something close to normal is a sign that we are recovering.

Before the financial crash, “normal” rates were around 5%. We could now see the new normal at around 2%, which still leaves historically very cheap borrowing costs.

If you’re a saver – there are more of them than there are borrowers – you should start to see your interest payments go up. Most mortgage holders are on fixed rate agreements, so they are fine until those agreements come to an end. The new fixed rate offers will be a bit more expensive than the old ones.

However, a shock for some?

According to AJ Bell, there are 10 million Britons who have never seen rates above 1% in their adult life.

Laith Khalaf, head of investment analysis at AJ Bell, said: “A rate hike at the Bank’s February meeting is almost in, which, if realized, would be the first time since 2004. that the bank was raising interest rates in two consecutive meetings.

“Market prices suggest three more hikes this year, taking the base rate to 1.25% by the end of 2022, which would be its highest level since February 2009, just before the introduction of a rate. “emergency” of 0.5% and a QE.”

Why now?

The Bank and the US Federal Reserve are worried about inflation. Last night Fed Chief Jay Powell signaled that he was likely to act aggressively on rates in the near future.

Nathan Sheets, chief global economist at Citigroup, said: “Powell basically said to the markets and the economy, ‘put your seatbelts on, we’re getting ready to take off. If inflation doesn’t come down as expected, the Fed is ready to be vigorous.

Will the rise in central bank rates be enough to slow inflation? Many of the things driving up costs – supply chains, global energy costs – are beyond the Bank’s influence.

Who are the higher rates for?

Savers. Banks make more profit as margins increase. Bond investors should see yields rise, even as prices fall.

The Nationwide Building Society said today it would raise rates on a range of savings accounts by at least 0.15 percentage points.

Nationwide’s savings shakeup from February 1 will include rate hikes on children’s and regular savings accounts, the company’s Isa purchase assistance and loyalty accounts.

Who are higher rates bad for?

Higher rates could be bad for the stock market if investors shift to bonds and exit stocks, but some say the market is overvalued anyway.

Khalaf again: “A higher base rate will mean the Treasury will have to pay significantly more interest on the £875bn of gilts held under the QE program, and that could have significant implications for sustainability of any largesse the Chancellor might wish to indulge. the March budget.

However, about one-third of the interest paid on gilts goes to the Bank. It’s not so bad.

However, higher interest payments will bolster the Chancellor’s case for pushing ahead with tax hikes in April, deepening the current cost-of-living crisis.

If inflation and borrowing costs continue to rise, will wages rise?

Yes. Otherwise, employees will start quitting. We are already seeing pay rises across the economy, with companies like Sainsbury’s and Aldi raising hourly wages for staff.

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