Interest rates: Rocketing peaks demonstrated in graphic
We use your sign-up to provide content in ways you’ve consented to and to improve our understanding of you. This may include adverts from us and 3rd parties based on our understanding. You can unsubscribe at any time. More info
Currently, the UK’s base rate is at 2.25 percent and has been raised by the central bank’s Monetary Policy Committee (MPC) to mitigate the impact of inflation. The Consumer Price Index (CPI) rate of inflation is currently at 10.1 percent and is expected to remain high for the foreseeable future. Many financial analysts believe a rate rise to three percent of 75 basis points will be implemented on Thursday.
However, other experts do not think an interest rate rise of this magnitude will be considered necessary by the Bank of England.
The central bank has consecutively hiked the nation’s base rate over the last couple of months which has been passed onto banks and building societies.
Savers have been able to benefit from this as inflation has eroded returns on their accounts in the last year.
However, the suggestion of “overestimated” interest rate increases will be welcomed by mortgage holders and those in debt who have had to pay more as a result of the Bank of England’s decision.
READ MORE: 70 health conditions qualify for extra £156 a week in PIP from DWP
James Smith, ING Developed Markets’ economist, discussed why these forecasts may not be set in stone.
Mr Smith said: “Markets and most economists are expecting a 75 basis-point rate hike from the Bank of England on 3 November.
“But we think a 50 basis point increase is narrowly more likely. More importantly, we think the bank rate is unlikely to go above four percent next year.
“And that suggests that markets are overestimating the amount of tightening still to come.”
According to the economist, previous comments from members of the MPC suggest a smaller interest rate would be preferred by the committee.
He added: “It’s becoming increasingly clear that the Bank of England is uncomfortable with the amount of tightening markets’ pricing.
“Investors still expect Bank Rate to peak around five percent next year. In a recent speech, BoE deputy governor Ben Broadbent suggested that GDP would take a near-five percent hit over coming years if the Bank were to deliver that sort of tightening.
“The Bank’s August forecasts – which themselves already pointed to a five-quarter recession – were based on a much lower terminal rate of roughly three percent.
READ MORE: Paramedic shares how she dishes up tasty meals costing 68p per portion
“Citing a simple model, Broadbent suggests recent fiscal announcements warrant ‘only’ an extra 75 basis point of tightening on top of that.”
Furthermore, he outlined why the present predictions look as “dismal” as they are leading up to the MPC’ next meeting
The finance expert said: “It’s important not to take this too literally, but it’s nevertheless compatible with our long-standing view that the bank rate is unlikely to go above four percent.
“Even Catherine Mann, one of the most hawkish committee members, was quoted saying recently that markets are “too aggressively priced”.
“That frames the messaging we can expect from Thursday’s meeting.
“The new set of forecasts due, which crucially are based on market interest rate expectations, are likely to be dismal – showing both a deep recession and inflation falling below target in the medium-term.
“That should be read as a not-so-subtle hint that market pricing is inconsistent with achieving its inflation goal.”
The Bank of England’s MPC are due to meet to discuss the UK’s base on Thursday, November 4.
Source: Read Full Article