Bank of England warning: Interest rates expected to rise to 0.5% to combat inflation

Question Time: Liam Halligan says 'real inflation is much higher'

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Rates are set to rise from 0.25 percent to 0.5 percent to tackle the UK’s skyrocketing inflation which is leading to a spike in the cost of living. The bank’s Monetary Policy Committee (MPC) will make the announcement later today in what is expected to be the first back-to-back interest rate hike since 2004. In December 2021, the Bank of England increased interest rates from 0.1 percent to 0.25 percent, citing that it could no longer ignore rising inflation and needed to intervene.

Interest rates could go as high as 1.5 percent by spring which the bank hopes will lower inflation to its two percent target.

Due to the current energy crisis, brought on by the external pressures in the wholesale market, gas and electricity bills are continuing to rise which is expected to result in inflation hitting six percent in spring.

Later today, experts are predicting the energy price cap to rise by around 50 percent which will also exacerbate the financial pressures placed on households.

Towards the end of last year, Consumer Prices Index (CPI) inflation soared to a 30-year high of 5.4 percent in another blow to consumers.

In a recent survey carried out by Aegon UK, some 70 percent of Britons aged 43 to 56 voiced their concern about the rate of inflation.

Specifically, around a quarter of those polled said they were very concerned about facing money difficulties due to rising inflation and the potential financial consequences.

Steven Cameron, pensions director at Aegon, said: “With inflation rising to its highest rate since 2011, many individuals are facing a cost of living crisis as prices surge.

“At what is already a penny-pinching time for households the length of the country, our research shows that a high proportion are concerned about the immediate impact of inflation levels not seen for a decade on the affordability of everyday living, from hikes in gas and electricity costs to the price of essential items such as clothes and food.”

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As well as this, Mr Cameron shared how hiking interest rates will do very little to mitigate the impact on savers.

He added: “A high proportion of those we surveyed said that they were concerned about not being able to save as much as a result of rising inflation as well as the purchasing power of cash savings decreasing.

“Those holding large amounts in cash savings are particularly at risk from high inflation. Despite the Bank of England raising interest rates in December to 0.25 percent, any of this increase passed on to savers is likely to be outweighed by inflation decreasing purchasing power.”

Martin Beck, the Chief Economic Advisor to the EY ITEM Club, outlined what a hike in interest rates will mean for homeowners and those looking to get onto the property ladder.

He said the prospect of a series of interest rate rises in 2022, starting with an expected hike in today’s meeting, would translate into higher mortgage rates.

He added: “And cost of living pressures faced by households from rising inflation and taxes mean fewer people will be able to afford to borrow the necessary amount they need to buy at higher mortgage rates.”

Thomas Pugh, an economist at RSM UK, predicted a unanimous vote across the Bank of England’s MPC for a hike on interest rates, explaining what the impact will likely be on savers.

Mr Pugh said: “Inflation is being primarily driven by energy, fuel and food prices – these three categories accounted for more than half of the 5.4 percent rise in the price level in November – and those are largely determined by international markets.

“In addition, consumers are facing a 50 percent jump in energy bills in April, along with a hike in national insurance rates, which will weigh on consumer spending and GDP growth.

“Adding higher interest payments to these costs would only worsen the outlook for consumer spending, and damage the economic recovery.”

The decision from the Bank of England’s MPC meeting is expected later today at 12pm.

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