In a surprise to no one, the Bank of England’s Monetary Policy Committee (MPC) has voted nine-zero to hold interest rates at 3.75 per cent. The unanimous decision is the first time the MPC have been in complete agreement since September 2021.
Before Trump and Israel’s bombs rained down on Iran, the markets had been overwhelmingly expecting a rate cut. This would have been welcome news for mortgage holders and the government. But with an energy price shock sending inflation expectations in the wrong direction, we are lucky the MPC didn’t hike rates this time. The markets are now expecting a rate hike towards the end of summer after inevitably higher energy prices lead to higher inflation.
Even before today’s announcement the mortgage market was feeling the pressure. Data from Moneyfacts shows that as of this morning the average two-year-fixed mortgage has risen to 5.32 per cent – up from 4.83 per cent at the start of the month and the highest rate in nearly a year.
More depressingly, things are likely to get worse before they get better as the MPC seemed to agree with market expectations of a rate hike in the near future. The committee said: ‘Monetary policy cannot influence global energy prices but aims to ensure that the economic adjustment to them occurs in a way that achieves the 2 per cent target sustainably.’ Economist waffle for: rates may have to go up.
On top of that, the Bank’s updated forecasts expect energy prices to add 0.75 percentage points to inflation in the third quarter of this year, with another 0.25 percentage points added by businesses passing on their costs to customers. This in turn could lead to a further inflationary cycle.
Still, there was at least some relatively good economic news this morning, when the ONS reported a slight improvement in the jobs figures. The trouble is: if energy prices keep rising, Britain risks turning a corner only to slam head-on into a concrete wall.
If oil and gas prices continue to surge then we’ll risk serious inflation (possibly higher than 5 per cent) as energy prices feed into the July energy price cap. Rachel Reeves will be under a staggering amount of pressure to make a serious intervention to prevent that cap rising too sharply. But she finds herself in the unenviable position of having neither any political leeway nor much fiscal headroom. Britain is now – almost uniquely – exposed to global crises. There’s not much we can do but hope things get better.
Comments