Bank of England poised to raise interest rates for 13th time despite mortgage timebomb – business live | Business

The foreign secretary, James Cleverly, has hit out at suggestions that the UK should intentionally enter a recession to dampen inflation.

Speaking to Sky News, he said the government remained committed to cutting inflation, but that triggering a recession was not the answer.

Cleverly said:

“What we need to do is we need to grow the economy.

“High interest rates don’t help with that. This idea that we should consciously be going into recession I don’t think is one that anyone in government would be comfortable subscribing to at all.”

Cleverly also insists that Rishi Sunak remains “absolutely committed” to halving inflation this year.

He told LBC:

“The prime minister is absolutely committed to halving inflation this year and we’re also making sure that we support those people who are struggling to pay the bills, and we’re also putting pressure on the lending industry, the banking industry, to make sure they do the right thing by their customers and help anyone that is struggling or is at risk of default.

“So, we’re dealing with the here and now, but we’re also dealing with the future.”

To hit that target, inflation must drop to 5% by December, down from 8.7% last month. It didn’t look particulary challenging at the start of the year, when Sunak made the pledge, but persistently high inflation makes it more stretching.

The City is split over how high the Bank of England may raise interest rates, by the “cursed ratio” of 52:48.

The money markets are indicating that a chunky half-point increase in interest rates, from 4.5% to 5%, is a 52% probability.

A smaller, quarter-point rise, to 4.75% is a 48% chance, according to implied probabilities based on the value of interest rate swap derivatives.

52:48, of course, was the split in June 2016 when the public voted to leave the EU.

This ratio reappeared in September 2019 when MPs voted to take control of House of Commons business to block a no-deal Brexit.

It has also appeared in other polls …

At 8.7% in May, the UK’s annual inflation rate is much higher than the eurozone (6.1%) and the US (4%).

Q: Why does the UK have a worse inflation problem than other countries?

Ex-Bank of England policymaker Sir Charlie Bean explains that the UK labour market is tighter than in continental Europe – partly because half a million workers left the UK during the pandemic.

This means the UK still has historically low unemployment, and high vacancies, which adds to wage increases.

Leaving the EU is another factor, Bean tells the Today programme:

In addition, Brexit has made it harder for firms to suck in extra labour they need at short notice from abroad.

The supply of labour is less elastic – that also helps to strengthen the hand of labour.

Increased trade friction with Europe means product markets are less competitive, Bean adds.

Sir Charlie Bean, a former deputy governor for monetary policy at the Bank of England, believes he would vote for a large, half-point increase in interest rates today if he were on the monetary policy committee.

Bean told Radio 4’s Today programme that:

If I was on the committee, I would probably vote for a 50-basis point.

I’m sure on the committee … there will be quite a lot of discussion about whether to go for a quarter or a half.

Bean suggests that at the Bank’s last meeting at the start of May, policymakers may have thought they could have paused their rate increases for a while.

However, the news since that meeting has been “unambiguously bad on the inflation front”.

Inflation was higher than expected in April and May, at 8.7%, while the latest jobs report shows pay growth was much high than expected this spring.

Bean explains:

You put all of that together, and it’s a pretty clear signal that it needs further rate increases.

Good morning.

Britain’s mortgage time bomb is ticking louder today, with interest rates likely to be raised for the 13th time in a row at noon.

After Wednesday’s inflation shock, the Bank of England is expected to raise borrowing costs again as it tries to cool the cost of living crisis.

Bank rate is forecast to rise by at least a quarter of one percent, from 4.5% to 4.75%, but some in the City of London believe the BoE could unleash a half-point hike, to 5% – a level last seen in April 2008.

The Bank hopes that tightening monetary policy will squeeze rising price pressures out of the system. Yesterday, we learned that inflation failed to fall as hoped in May, with the annual CPI rate stuck at 8.7% – well over the UK’s 2% target.

Most alarmingly, core inflation (stripping out food, energy, alcohol and tobacco) rose in May.

The Bank of England is already facing heavy criticism for its failure to keep inflation close to its 2% target, including from some MPs, after leaving rates at record lows after the pandemic until December 2021.

Mike Riddell, head of Macro Unconstrained at Allianz Global Investors, argues that the Bank has “little choice” other than to continue hiking rates.

Riddell says:

• Whilst headline inflation is flat vs last month, core inflation has accelerated even further. This leaves the Bank of England (BoE) with little choice other than to continue hiking rates, to weaken demand

• It seems very unlikely to that the BoE would deliberately run monetary policy too loose

• If problems on the supply side do not improve, then the BoE will be forced to further reduce demand to get wage growth lower. If it doesn’t, then the BoE may as well not have an inflation target

Raising interest rates will hurt borrowers, at a time when mortgage holders are already facing sharp increases in costs if they need a new deal.

The Resolution Foundation has calculated that, due to the rising interest rates, people looking to remortgage their homes will pay an average £2,900 a year more from 2024.

More than 1 million households across Britain are expected to lose at least 20% of their disposable incomes thanks to the surge in mortgage costs expected before the next election, according to the Institute for Fiscal Studies.

Yesterday, JP Morgan economist Karen Ward, who advises the chancellor, Jeremy Hunt, warned that the Bank has to “create a recession” if it is to control inflation.

Labour are warning that “people are being hit hard by a Tory mortgage penalty”. They are proposing a five-point plan to cushion the hit from soaring mortgages and halt repossessions.

Under Labour’s plans, banks would be required to allow lenders to switch to interest-only repayments, extend their mortgage repayment period, reverse these measures at any point, and would have to wait at least six months before seeking to repossess a property, and make sure none of this had an impact on borrowers’ credit ratings.

The agenda

• 7.45am BST: French business confidence

• 8.30am BST: Switzerland’s central bank sets interest rates

• 9am BST: Norway’s central bank sets interest rates

• 9.30am BST: Latest realtime economic activity data for the UK

• Noon BST: Bank of England decision on interest rates