Traders are betting that the central bank will more than double the cost of loans to counter runaway inflation.
The public has lost confidence in the Bank of England's (BoE) handling of inflation over the past three quarters, according to a new survey commissioned by the bank.
The Bank of England may be forced to raise interest rates to 4% as early as next year to combat runaway inflation, even as the risk of recession from the cost-of-living crisis grows.
Stockbrokers are betting that the central bank will more than double borrowing costs from the current 1.75% to respond to inflation, which is at its highest level in more than 40 years.
The central bank's benchmark interest rate is expected to reach 4% in May 2023, in line with financial market forecasts, which should further increase pressure on mortgage loan holders.
The policy rate is expected to be above 3% at the end of the year and could peak near 4.1% in June 2023, depending on interest rate derivatives linked to the dates of Threadneedle Street's Monetary Policy Committee meetings. The bank is expected to cut rates to around 3.8% by the end of next year as it anticipates easing inflationary pressures and a prolonged recession.
The moves in financial markets come as mortgage lenders raise the rates they offer borrowers. Figures from data provider Moneyfacts show that the average interest rate on new two-year fixed-rate mortgages rose above 4% this month for the first time since 2013. Lenders set their rates based on the central bank's benchmark rate and financial market conditions, as well as competition from other providers.
Expectations of a dramatic increase in borrowing costs come as inflation rises above 10 percent for the first time since the 1980s. Some city economists forecast a peak of more than 18 percent in January next year, exacerbated by a sharp increase in household energy bills expected in October and early next year.
The bank raised interest rates by 0.5 percentage points this month, the largest increase in nearly 30 years. For interest rates to reach 4%, borrowing costs would have to rise just as much.
Threadneedle Street is pursuing a government-mandated goal of steering inflation toward 2%. That target was heavily criticized during the election for Conservative leader after Liz Truss said she might change her mandate to control inflation.
Financial market forecasts suggest it would raise borrowing costs more than the Federal Reserve, with traders betting interest rates will peak at 3.8% next March.
BoE Governor Andrew Bailey spoke to reporters at a press conference that restoring the UK's inflation objective to 2% was a top priority, and said that all options were on the table at a future policy meeting.
No comments:
Post a Comment