1 in 3 chance interest rates will hit 5.75%: Stark warning for households

Interest rates have an almost one in three chance of rising to as much as 5.75% this year as the Bank of England is forced to step up its fight against inflation.

Financial markets are increasingly betting that interest rates have much further to go after this week’s data showed that the battle to contain prices turned out to be more difficult than expected.

And the Bank of England was given political cover yesterday to keep raising rates after Chancellor of the Exchequer Jeremy Hunt said he was “comfortable” with rate setters doing what is necessary, even at the risk of triggering a recession.

Interest rate expectations have risen sharply in recent days.

Before this week’s inflation numbers were released, there was hope that they had little further to go after hitting 4.5 percent earlier this month.

Now the markets are betting that they will hit 5.5 percent by the end of the year — and are counting about a 30 percent chance that they will hit 5.75 percent.

Rates are expected to drop from the beginning of next year.

But they still look set to stay above 5 percent well into 2024, meaning borrowers will still be under pressure as the likely general election approaches.

The increase in interest rate expectations comes after the Office for National Statistics (ONS) said the consumer price index (CPI) of inflation fell to 8.7 percent last month.

It was the first time since last summer that the CPI fell below 10 percent.

But the figure was still much higher than expected.

The data was described by HSBC bank economists as “a shock.”

They raised their expectations for bank rates to 5.25 percent, but said: “We still think the risks are leaning towards rates that need to be even higher this year.” While the overall rate has fallen, ‘core’ inflation — excluding volatile items such as food and energy — has risen from 6.2 percent to 6.8 percent, the highest in more than 30 years.

Rising core inflation worries the Bank, as it indicates that rising prices are set to seep into the economy even after the initial shock caused by the war in Ukraine has faded.

The numbers shocked markets this week, pushing up the swap rates used to price mortgage products and pushing UK bond yields to levels not seen since last autumn’s mini-Budget Crisis.

Nationwide, Britain’s largest building society, raised rates on some mortgage deals by 0.45 percentage point. Experts said rivals were likely to follow.

But a source at a major bank that has not raised its rates downplayed the volatility, saying: “Markets can overreact when we see unexpected data and that may be what we are seeing now.

‘The base rate then often does not follow the path that the markets expect via the swap rates.’

Even before this week’s numbers, there were fears about how long it would take to beat inflation.

Forecasts from the Bank of England this month suggested it would take nine months longer than previously thought for the CPI to fall to the 2 percent target.

It now expects inflation to still be above 5 percent by the end of this year, meaning Prime Minister Rishi Sunak will barely meet his target of halving it.

Bank Governor Andrew Bailey admitted last week that the wage and price spiral unleashed by the initial inflation spike may take longer to settle than it started.

Bailey warned that inflation could remain high, due to “the possibility of more persistence in domestic wage and price formation.”