More misery predicted for struggling mortgage borrowers as markets price in two more interest rate hikes before the end of 2023
Markets are pricing in two more interest rate hikes this year in yet more misery for struggling mortgage borrowers.
The Bank of England raised rates by a widely expected 0.25 percentage points yesterday, with some observers thinking there might be another ‘shock and awe’ 0.5 per cent increase.
Traders are now pencilling in another 0.25 per cent rise in September and another in November or December, taking rates to 5.75 per cent. Analysts at Investec predicted a peak of 5.75 per cent this year.
But investment bank ING forecast 5.5 per cent, saying a second 0.25 per cent hike towards the end of the year would ‘largely depend’ on whether inflation in the services sector had slowed.
Yesterday’s increase was greeted with relief by the markets – avoiding a half-point rise provided a sign the central bank was less troubled by the outlook for inflation.
Latest hike: The Bank of England – led by governor Andrew Bailey (pictured) – raised interest rates by 0.25 percentage points yesterday in a move that was widely expected
Sterling slipped following the announcement by the rate-setting Monetary Policy Committee (MPC), which voted six to three for the increase in rates to 5.25 per cent, their highest since 2008.
Two dissenters backed a 0.5 per cent hike and one voted to leave rates at 5 per cent.
The pound initially dropped to a five-week low of around $1.262 against the dollar but recovered to around $1.265.
On the bond markets, yields on UK gilts fell, meaning the Government is likely to find it cheaper to borrow.
The FTSE 100 ended the day down 0.4 per cent, or 32.47 points, at 7,529.16. But the more UK-focused FTSE 250, which is more exposed to the effects of higher interest rates, closed up 0.1 per cent, or 20.77 points, at 18,833.65.
Economists had been divided about how aggressive the Bank would be, with around a third having predicted a 0.5 per cent hike similar to the one in June.
But traders pared their bets on further rises following the emergence of the divided opinion among the members of the MPC.
‘The vote split indicated we are nearing the peak now,’ Luke Hickmore, an investment director at Abrdn said.
But the Bank warned interest rates could remain higher for longer as inflation, which was recorded at 7.9 per cent for June, was still well above its 2 per cent target.
The MPC said it would keep rates ‘sufficiently restrictive for sufficiently long’ to get inflation back down.
Matthew Ryan, head of market strategy at financial services firm Ebury, noted the Bank was ‘set to raise rates more aggressively than its peers,’ with the likes of the US Federal Reserve having paused their own rate rises.
‘UK rates could remain higher for longer than in most other major nations,’ Ryan said, adding this would help strengthen the value of the pound.
Looking further ahead, Paul Dales, the chief UK economist at Capital Economics, said that the next big surprise would be ‘how fast rates fall in late 2024 and 2025’, particularly if the mounting cost of borrowing triggered a recession.
While the Bank of England did not predict an economic downturn, Governor Andrew Bailey said that growth was still ‘pretty sluggish’ although he maintained that bringing down inflation was ‘going to be good for growth going forwards’.
The Bank cut its growth forecasts for next year and 2025.
For 2024, it expects UK gross domestic product (GDP) to grow 0.5 per cent, down from previous estimates of 0.75 per cent.