UK homeowners brace themselves for potential rate hike

LONDON — British homeowners and borrowers are bracing themselves for an interest rate increase from the Bank of England on Thursday, which would be the first in a Group of Seven industrial nation since the onset of the coronavirus pandemic.

Financial markets think the central bank is more likely than not to raise its main interest rate from the record low of 0.1% to 0.25%, to rein in inflationary pressures. Even if it doesn’t, there’s an expectation that the bank’s rate-setting Monetary Policy Committee will signal a rate rise soon, potentially at its next meeting just before Christmas.

“The long game of limbo for the Bank of England appears almost at an end, with expectations growing that there will be a rate rise at Thursday’s meeting,” said Susannah Streeter, senior investment and markets analyst at stockbrokers Hargreaves Lansdown.

Rising expectations of a rate hike have prompted several commercial banks to withdraw many super-cheap fixed mortgage deals. Last week, there were 82 such deals available at between 0.84% to 0.99% but by Tuesday this had shrunk to 22 deals, according to financial information firm Defaqto.

Those homeowners already on variable rates — around a quarter — will likely face an immediate increase in their mortgage payments if their lenders respond to any rate hike.

“We have enjoyed record low interest rates for a long time and they had to start going back up at some point,” said Katie Brain, consumer banking expert at Defaqto. “For anyone who needs a mortgage, there is never a good time for this.”

A number of policymakers on the rate-setting panel have voiced concerns about the pick-up in prices, due largely to the sharp increase in energy costs in the wake of the global economic recovery from the pandemic and the lifting of lockdown measures. The hope would be that an early rate rise would keep a lid on the peak in inflation

Though the headline measure of consumer price inflation dipped slightly in the year to September to 3.1%, it remains more than a percentage point above the Bank of England’s government-mandated target of 2%. It is also expected to rise further in coming months, with or without a rate hike.

In the past, the rate-setting panel has sometimes held off from raising interest rates as it judged the increase in prices to be due to temporary phenomena. Some of the increase in the current rate of inflation is due to temporary factors — the annual comparisons are warped by the fact that an array of prices, notably oil and gas, slumped in the early months of the pandemic.

However, there are signs that the rise in inflation currently is becoming embedded in the British economy through wage increases.

“While we consider it’s slightly more likely that the bank will wait until the final meeting of the year on Dec. 16, a hike this Thursday would not come as a surprise,” said Kallum Pickering, senior economist at Berenberg Bank.

“Either way, the vote is likely to be split,” he added.