The prospect of four interest rate rises over the next 12 months has been questioned by one of the Bank of England’s more hawkish policymakers.
The financial markets have been pricing in four quarter-point increases, which would take Bank Rate from its current 3.75% to 4.75%.
Despite regularly arguing for higher interest rates in the past, the Bank’s chief economist, Huw Pill, says he is “sceptical” that such substantial increases will be necessary.
Speaking at the International Monetary Fund’s annual meeting in Bangkok, the Times reports he questioned the markets’ expectations, saying: “But is four hikes appropriate over the next year?”
Why is Pill questioning the forecasts?
The concern is that the conflict in the Middle East and elevated energy prices could lead to businesses increasing their prices and workers demanding higher wages, creating more persistent inflation.
Annual UK inflation is currently well above the Bank’s 2% target at 3.1% and is expected to exceed 4% early next year.
“To get 100 basis points [of rate rises], we need a concrete manifestation of these risks [to wages and prices],” Pill said, adding that more evidence would become available over the next six to nine months.
At a later panel discussion, he also warned against assuming an initial increase would trigger a prolonged series of rises similar to those seen in 2022 and 2023.
“We shouldn’t give the impression that because we act now, we are on another staircase … It’s a different shock,” he said.
Is a November rate rise still likely?
Despite questioning the scale of future increases, Pill remains in favour of raising the Bank Rate now to prevent inflation becoming entrenched.
“It would have been good to move early and influence market expectations, and send a clearer signal we were active and agile.”
At its September meeting, the Bank’s nine-member Monetary Policy Committee voted 6–3 to leave rates unchanged at 3.75%, with Pill among those calling for an increase to 4%.
Whatever happens to Bank Rate in the longer term, the financial markets currently regard a quarter-point rise at the next meeting on 5 November as highly likely.
What does this mean for mortgage rates?
And the market’s expectations of future interest rate increases have pushed up wholesale swap rates, which lenders use to price fixed-rate mortgages.
According to Moneyfacts, the average five-year fixed mortgage rate reached 6% in early October for the first time in approximately three years.
Pill’s comments could help ease expectations of further interest rate increases, although there is not yet any evidence of a sustained fall in swap rates.
Higher borrowing costs have already had a dampening effect on the housing market, restricting affordability for buyers and increasing refinancing costs for both homeowners and landlords.
According to Rightmove, buyer demand in September was 9% lower than a year earlier, while the number of homes for sale was at a 12-year high for the time of year.
The next UK inflation figures are due on 21 October, ahead of the Bank’s interest rate decision on 5 November.
