Bank of England base rate could hit 7%
The Bank of England (BoE) may have to increase the base rate to seven per cent, experts have warned.
To tackle high inflation, which is currently still at 8.7%, the bank may be forced to push the base rate further from its current position at 5%.
This could spell further misery for mortgage holders, who are already dealing with big rises to their repayments. Average mortgage rates for two and five-year fixed-rate mortgages have now passed the six per cent mark and are expected to rise further.
Economist Allan Monks at JPMorgan Chase & Co said pushing the base rate to seven per cent could trigger a “hard landing” in the economy to push down inflation.
In a note to clients of the investment bank, Monks said “a break in behaviour, or hard landing, looks increasingly likely at some point over the next year if inflation is to be brought under control in the UK”.
The central forecast from the bank is that inflation would peak at 5.75% by November but in the latest note it has warned the base rate could reach seven per cent under some scenarios. However, he did say there were lots of caveats to this analysis.
‘Far from getting on top of inflation’
Other investment banks and experts have echoed similar warnings.
Schroders recently increased its predicted rate for the base rate. Azad Zangana, economic expert for the bank, said “events from the past few weeks, incoming data, and a surprise 0.5% rise in the base rate, suggest that the BoE remains far from getting on top of inflation”.
The bank’s prediction is that rates will peak at 6.5% by the end of 2023, 1.5 percentage points higher than its previous forecast for a peak at 5%. It is now forecasting a rise by 50 basis points in August and September, before slowing to 25 basis points rises in November and December.
He said: “This is one of the highest forecasts in the market and we anticipate rates at this level will drive the UK economy into a recession.
“Unfortunately, the BoE is no longer able to wait and see how the interest rate rises so far will affect the economy.
“We also cannot rule out that the path the bank seems now to find itself on, with the potential to disproportionately impact the housing market, will not result in financial stability issues.”