The Bank of England is poised to raise interest rates to their highest level in 13 years as it seeks to rein in rising costs of living.
Its Monetary Policy Committee (MPC) meets on Thursday to deliver its latest rate decision amid spiraling inflation fueled by rising energy costs. Consumer price inflation is forecast to hit 9 percent by the end of this year, with some analysts predicting it could hit double digits.
Economists expect the MPC to raise rates from 0.75% to 1% on Thursday, a level not seen since the aftermath of the 2009 financial crisis.
Until recently, the consensus had been that a rise to 1.25 percent was likely, but an increasingly alarming set of economic indicators has tipped the scales toward a more cautious approach.
As Governor Andrew Bailey warned, the Bank must walk a “very fine line” between cooling inflation and triggering a recession.
Consumer confidence slumped last month while retail sales were lower than expected as shoppers cut back on spending amid growing fears about rising energy bills, food prices and fuel costs.
Rishi Sunak has so far rejected calls to offer targeted financial support to struggling families, a move that would go some way to boosting consumer confidence.
So far, the chancellor has chosen to stick to previously announced plans for municipal tax cuts and a loan to cover part of the increase in energy prices.
Last week he said it would be “foolish” to offer more help with energy bills now, during the summer months, when people’s gas and electricity usage is typically lower.
In the absence of an injection of fiscal cash into the economy, it has been left to the blunt instrument of monetary policy to avert what threatens to be the worst pressure on living standards in living memory.
Rising interest rates on Thursday would mean higher monthly debt payments for businesses and homeowners, with those with adjustable-rate and tracker mortgages being hit first.
In all, about 2 million households could see monthly payments increase after Thursday’s decision.
About 850,000 borrowers have tracker mortgages that follow the Bank’s base rate, while another 1.1 million have standard variable rates (SVRs) that follow a rate set by the lender, but also often track the base rate.
First-time buyers who get a mortgage will also have to pay more.
Taking money out of household pockets would weigh more heavily on a UK economy that is struggling to recover from the pandemic.
Growth began to pull back sharply in February as the cost-of-living contraction took hold, with official data showing expansion of just 0.1%, down from 0.8% in January.
The bank said last month it believed growth would hit 0.7 percent in the first quarter, above earlier expectations that gross domestic product (GDP) would hold steady, with the labor market also holding up well.
But many experts see GDP stagnating in the second quarter as consumer confidence falters further.