A member of the Bank of England’s Monetary Policy Committee has today warned that households should prepare for interest rates to rise earlier than expected, amid surging inflation.
Michael Saunders, who sits on the Bank’s MPC which votes monthly on the Bank of England Base Rate of Interest, this week warned of a December rate hike in addition to the forecast February increase.
“I’m not in favour of using code words or stating our intentions in advance of the meeting too precisely, the decisions get taken at the proper time” said Saunders. “But markets have priced in over the last few months an earlier rise in Bank rate than previously and I think that’s appropriate.”
“The February one is fully priced in and for December, it’s half priced in. I’m not trying to give a commentary on exactly which one, but I think it is appropriate that the markets have moved to pricing a significantly earlier path of tightening than they did previously.”
It comes as inflation throughout the year has surged past the Government target of 2%, to more than double that, with the Consumer Prices Index expected to exceed 4% in November.
“CPI is a measure of the change in prices for goods and services over time, making it the best measure for real-world cost of living increases for most people” said Andy McBride, director at Professional Contractor Mortgages. “Raising the Bank of England Base Rate from it’s current low of 0.1% would help to control inflation, but it would come at a significant cost for many.”
“The first rate increase in three years would push up outgoings for millions of households, most notably those on variable rate mortgages, with some of those finding bills unaffordable amid the current energy price crisis.”
Businesses would also suffer from the shock of a sudden increase in interest rates, with research recently revealing that businesses in the UK sit on a £1.4 trillion debt accumulated throughout the pandemic.
At it’s last meeting, the MPC voted unanimously to maintain Base Rate at 0.1%, where it has been since the beginning of the pandemic in 2020. Two MPC members did however vote against the Bank’s quantitative easing program continuing at its present level.
With no MPC meeting to be held in October, all eyes will be on the next meeting, scheduled for Thursday 4th November, which will also come alongside the quarterly Monetary Policy Report, highlighting inflation performance in more detail than previously.
“Petrol and energy alone makes up around 40% of the ONS basket of goods used to calculate inflation, making headlines about wage increases largely irrelevant as inflation exceeds wage growth, leading to a drop in real term wages.” Concludes McBride.
“This is totally unsustainable. Hopefully Mr Sunak has an ace in the pack in the forthcoming month to relieve this, as it appears right now that the Government and the Prime Minister are ignoring the issue, making the outlook for most pretty grim.”