- Bank of England expected to hold rates at 3.75% for sixth consecutive time
- Three MPC members likely to continue to press for a hike
- Concern about rising energy and food costs expected to be offset by continued weakness in the UK economy
Danni Hewson, AJ Bell head of financial analysis, comments on expectations ahead of next week’s interest rate decision:
“No one wants the Bank of England to be wrong footed when it comes to interest rates. If rate setters hike too quickly it could cause the UK economy unnecessary pain, stalling already fragile growth and adding to the difficulties being faced by many struggling to find work.
“On the other hand, if rising costs, particularly those of energy and food, become entrenched and employers feel boxed into offering inflation busting pay increases, MPC members will be blamed for not acting proactively to prevent inflation from igniting, especially as the ECB has now made two moves to tighten policy.
“Three rate setters have already made the case for making a pre-emptive strike, a case which will have been strengthened over recent days as the price of Brent crude has shot back over the $100 a barrel mark and food producers are warning that this year’s Christmas table will be much more expensive to fill.
“Putting up interest rates in the UK won’t lower geopolitical tensions or bring down international energy prices, but it does risk weakening domestic demand at exactly the moment households and businesses are struggling to maintain a recent uptick in confidence.
“And whilst next week’s inflation data is expected to show another small jump in headline CPI it’s still way below where it was the last time the Bank acted to raise rates at the end of 2021. Though there were some similarities back then, inflationary pressures were broad based, supply chains had been disrupted by the pandemic, labour shortages were widespread and demand was rebounding strongly as economies reopened.
“Financial markets are still pricing in a hike by the end of the year, but that sentiment has shifted as many times as the oil price. We could end up exiting 2026 with exactly the same base rate as we had when the clock chimed in the new year and the next move could well be the cut that had been priced in before the Iran war began.
“And rates are still restrictively high, with consumers facing ongoing pressure from higher mortgage payments, elevated taxes and weakening real wage growth. Business investment has also been subdued amid uncertainty over the domestic and global economic outlook, something the chancellor must be mindful of as he prepares the ground for his first budget.”
What this might mean for savings and mortgages
Sarah Coles, head of personal finance at AJ Bell, comments:
“If the Bank of England chooses to hold rates rather than raising them, you’d be forgiven for assuming that rises in savings and mortgage rates would peter out. However, both markets aren’t driven entirely by the next move the Bank of England makes.
“Fixed deals depend to a large extent on rate expectations, because these feed into the gilt yields that drive the swap markets where these rates are set. The fact that gilt yields have soared means there’s still plenty of upwards pressure on fixed rates.
“The mortgage market tends to move faster than savings, because it’s so highly competitive, so we have already seen plenty of lenders raise rates, including several of the giants.
These won’t be the last of the rises, so anyone in the market for a new deal or a remortgage should make a move sooner rather than later.
“The savings market tends to nudge upwards slowly – as no bank wants to pay more than it has to. It means we’ve seen slower rises, but three- and five-year deals have risen over 5%, and two-year deals are edging ever-closer. There’s every chance there are more rises in the pipeline. However, there’s a risk in waiting to switch savings accounts in case rates rise further. There are no guarantees rates will go any higher, and in the interim, you might be earning a miserable rate on your money. It’s worth considering the deals as they stand, and whether they’re attractive enough to take the plunge.
“Unlike the mortgage market, most savings are in easy access accounts, which are now offering significantly less than the most competitive fixed deals. They’re affected much more by the Bank of England’s decisions, so a hold is likely to mean we don’t see much change. If you need to keep your money in easy access, it’s worth shopping around for a better deal, and checking online banks or cash hubs. But given the premium you can get for fixing, you could also consider whether you could fix a portion of your savings in return for a better rate.”