Interest rates ‘set to be hiked’ by Bank of England on Thursday in fresh blow to homeowners

The Bank of England was expected to hike interest rates for the 11th time in a row on Thursday after a shock resurgence in UK inflation.

Many economists are pencilling in a rise to 4.25 per cent from 4 per cent, with the case for an increase strengthened by official figures on Wednesday revealing a surprise jump in inflation to 10.4 per cent last month.

The noon decision also comes after the US Federal Reserve raised its key overnight interest rate by a quarter of a percentage point, despite recent turbulence in financial markets amid fears of a banking crisis.

Sonja Laud, chief investment officer at Legal & General Investment Management, highlighted the “surprising breadth, strength and stickiness in structural inflation forces” that the BoE will seek to target to bring down long-term inflation expectations.

“Otherwise you are getting into that spiral, that further price increases will lead to further wage demands and where is the end of that,” she told BBC Radio 4’s Today programme.

“You have to break this and I think this is what we will hear from them today, very much in line with what we have heard from the Fed, and obviously the ECB earlier.”

An increase by the BoE would swiftly feed through into higher mortgage bills for hundreds of thousands of households, tightening the cost-of-living squeeze.

High street banks are under growing pressure from the Commons Treasury Committee to also put up saving rates, rather than dragging their feet in doing so while being quick to ramp up the cost of borrowing.

But the Bank of England faces a difficult balancing act, weighing up the need to rein in inflation with the worries over banking woes and the possibility they may start to clamp down on lending.

Shares on Wall Street tumbled sharply overnight on the Fed’s decision and its comments suggesting it does not expect to cut rates anytime soon, highlighting the fragility of stock market confidence.

After three days of bounceback gains, the S&P 500 fell 1.7 per cent, while the Dow Jones Industrial Average lost 1.6 per cent and the Nasdaq composite dropped 1.6 per cent.

UK economists had been on the fence about whether Britain’s central bank will opt for another rate rise at Thursday’s Monetary Policy Committee (MPC) meeting, following a period of instability in the global banking sector.

Some of the sharpest drops again came from the banking industry, where investors are worried about the possibility of more banks failing if customers pull out their money all at once.

But the unexpected jump in Consumer Prices Index inflation, from 10.1 per cent in January to 10.4 per cent in February, is seen as making it harder for the Bank to justify pausing its prolonged cycle of rate increases.

Craig Erlam, a senior market analyst for Oanda, said: “Whatever flexibility the Bank of England may have thought it would have on Thursday was wiped out by Wednesday morning’s inflation data.”

He added there is “nothing that would justify a pause” in raising interest rates, “even against the backdrop of financial stability concerns and the knock-on effects of aggressive rate hikes”.

It follows the collapse of the US’s Silicon Valley Bank and the historic rescue takeover of Credit Suisse, with both events sending shockwaves through the financial markets and sparking fears of a global banking crisis.

It also threw into question whether higher interest rates are putting too much pressure on smaller lenders, which could be buckling under the weight of losses on their investments.

ING Economics suggests the Bank of England will want to see more evidence that inflationary pressures are easing up more broadly before ending its cycle of rate rises.

Its experts are also predicting a 0.25 percentage point increase, but said it could be the final rise before rates fall back down.

Meanwhile, Investec Economics predicts the Bank will opt for a “wait-and-see approach” and keep rates at four per cent while it assesses the situation.

Economist Ellie Henderson said: “The MPC will have to assess which is the lesser of two evils: the risk of inflation being higher for longer or the current threat to financial stability stemming from the rapidly evolving fears of a banking crisis.”