When will interest rates peak and how high will they go?

Interest rates will rise again today, most likely with 0.5 percent added to bring the base rate to 3.5 percent.

It shows how dramatic the shift in sentiment has been this year that a move of that magnitude will be viewed as relatively cautious by the Bank of England.

A year ago, the Bank made its first rate hike since the Covid emergency lockdown to 0.1 percent, pushing the base rate to just 0.25 percent.

To be fair to the Bank of England, it preceded the US Federal Reserve, but the slight upward move came only after months of warnings about inflationary pressures and calls to action.

The belated turn in the mood has subsequently led to a rise in the base rate to 3 percent – ​​and if all goes as expected, it will be 3.5 percent as of today.

Central banks have made a screeching turn from their inflationary is transient reporting to a “we must destroy inflation” attitude, even if it means going into recession.

However, the main question borrowers, savers and investors think about is how high interest rates will rise.

Like a child on a car ride, they want to know, “Are we almost there yet?”

Expectations on this have shifted significantly in recent months – and the market is now forecasting a key Bank of England interest rate peak of around 4.5%. This compares to suggestions of a spike of 6 percent or higher when the mini-Budget mini-financial crisis hit.

However, some analysts believe that after today we will be even closer to the end of the journey.

Philip Shaw of investment bank Investec expects interest rates to peak at 4 percent in March and start falling in the second half of next year “to support the economy.”

New ONS data released yesterday showed inflation was still raging at an agonizing 10.7 percent in November, but that was less than the 11.1 percent the month before and lower than the predicted 10.9 percent.

In the meantime, inflation in the US also came in lower at 7.1 percent, which relieved some pressure from the Fed.

Inflation is likely to prove more persistent in the UK than in the US, where high imported energy prices are less of an issue, and the increase in the energy price guarantee ceiling to £3,000 in April will put UK cost of living under pressure.

Nevertheless, it is likely that the forecast for a rapid fall in UK inflation beyond the middle of next year could be broadly correct.

The recession we are almost certainly already in and the resulting economic and consumer slowdown, rising interest rates, the pressure on high prices themselves and the Chancellor’s autumn declaration of tax increases are likely to take some of the edge off.

But chances are we won’t just see the inflation spike fade away and muddle through again in a world of low inflation and low rates – similar to those seen after the financial crisis.

The global economy is now running much less smoothly than it did in the first two decades of the 2000s. Factors ranging from war and geopolitical tensions to the hangover of the Covid lockdown and the end of the era of unorthodox monetary policy will make inflationary spikes much more likely .

It’s also easy to imagine a scenario where central banks cut rates as a painful recession becomes evident in the data as inflation dies down, only to have to raise them again when inflation returns.

The good news is that this volatility can create opportunities for investors, as Tom Becket argued at our recent Investing Show, giving savers a fair shot at better savings rates rather than being trapped for years.

No doubt a return to more normal interest rates would please the real estate market, limiting home price inflation driven by cheap money that means colossal mortgages for homebuyers.

It seems unlikely that we will have another seven and a half years with base rates at the same level as we did at 0.5 percent, from March 2009 to August 2016.

Welcome back to the interest rate cycle.