The Bank of England will have to raise interest rates to at least six percent to tame inflation, according to several former rate-setters. In a bid to tackle rising prices the Bank has raised its base rate twelve times in a row, but there are warnings it could rise even higher than the current 4.5 percent, piling more misery on mortgage borrowers but raising savers’ spirits.
Core inflation in the UK, which leaves out volatile food and energy prices, increased to 6.8 percent in April – its highest level in 31 years, official data from the Office for National Statistics show.
Though down from 10.1 percent, the Consumer Prices Index of inflation remains stubbornly high at 8.7 percent while food remains staggeringly expensive.
Investors have priced in another percentage point rise in Bank rate to 5.5 percent with the markets also suggesting there is a one in three chance of climbing to 5.75 percent by the end of this year.
Willem Buiter, who worked at the Bank’s Monetary Policy Committee (MPC), told Bloomberg: “They’re going to have to go significantly higher. There’s no way in which a 4.5 percent policy rate will do the job.”
The International Monetary Fund (IMF) said this week that the UK is forecast to avoid a recession this year, but high interest rates will likely be needed for some time yet to tackle inflation.
Chancellor Jeremy Hunt pointed to the IMF report as a vindication of the Government’s efforts to “restore stability and tame inflation”.
Mr Hunt on Friday backed interest rate hikes being used to calm soaring inflation even if they increase the risk of pushing the UK into recession.
He insisted in an interview with Sky News that the “only path to sustainable growth” is to bring down the high prices behind the cost-of-living crisis.
Nationwide, Britain’s biggest building society, increased some of its mortgage rates for new borrowing on Friday, saying this will ensure its rates “remain sustainable” in the current economic environment.
The rate increases, of up to 0.45 percentage points, only affect customers taking out a new mortgage deal. For first-time buyers and those looking to move home, rates will increase by between 0.05 percentage points and 0.40 percentage points on products up to 95 percent loan-to-value (LTV).
For those looking to remortgage, rates will increase by between 0.05 percentage points and 0.40 percentage points on products up to 90 percent LTV.
Switcher, additional borrowing and existing customer moving home rates will increase by between 0.05 percentage points and 0.45 percentage points, while shared equity rates will increase by up to 0.45 percentage points.
Mark Harris, Chief Executive of mortgage broker SPF Private Clients, said: “Given that inflation has come down, the market reaction has been surprising, with swaps, which underpin the pricing of fixed-rate mortgages, rising sharply.
“The markets have reacted negatively on the back of expectations as to where inflation would be by now, versus the reality.
“Fixed-rate mortgage pricing had already been rising with a number of lenders repricing recently or giving a heads up that they intend to do so.
“Santander and Halifax are just two lenders who have recently increased their rates and others are likely to follow suit, with short notice.
“The markets’ assessment of where interest rates are heading has been consistently wrong over the past nine months.
“Swaps can be extremely volatile and this is likely to be a knee-jerk reaction before they settle down.”
Mr Harris added: “We remain confident mortgage rates will shortly peak and the reductions, when they arrive, will be as quick as the recent rises.”
News of Nationwide’s mortgage rate increases came as 10 year gilt yields touched 4.42 percent on Friday, close to their peak after former Prime Minister Liz Truss’s disastrous mini-Budget decimated pension funds last autumn.
At that time the Bank of England was forced to step in to save the pensions industry from collapse with the promise of a £65billion rescue package.
Threadneedle Street is understood to be closely monitoring developments, according to the Mail on Sunday.
