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BOE: Full force of interest rate hikes is yet to be felt

According to one of its policymakers, the economy has flatlined and only a quarter of the impact from the Bank of England’s 14 consecutive increases in interest rates has fed through.

Swati Dhingra, a member of the central bank’s rate-setting monetary policy committee (MPC), said the full force of the steep rise in borrowing costs to 5.25%, after years of cheap loans and low mortgage rates, was only just beginning to hit household incomes.

Speaking to the BBC, she said she was concerned that millions of mostly young and poor households would be affected next year if interest rates remain as high as expected.

Dhingra said the rise in food and energy costs disproportionately affected those on low incomes, while the increase in mortgage costs and rents hit young people.

She said to the BBC: “The economy’s already flatlined. And we think only about 20% or 25% of the impact of the interest rate hikes has been fed through to the economy. So I think there’s also this worry that that might mean that we’ll have to pay a higher cost than we should be paying.”

In its last economic health check, the Bank said about 4 million households yet to face increased mortgage costs would “do so by the end of 2026”.

It means about three-quarters of the households with fixed-rate mortgages expiring before the end of 2026 have yet to feel the pain of higher debt costs.

The economy grew in August by 0.2%, according to Office for National Statistics data released on Thursday, up from a contraction of 0.6% in July.

Dhingra, who joined the MPC last year from the London School of Economics, said the August uplift was too small to avert a recession.

“When you’re growing as slowly as we’re growing now, the chances of recession or not recession will be pretty equally balanced. So we should be prepared for that… it’s not going to be great times ahead,” she said.

Susannah Streeter, the head of money and markets at the stockbroker Hargreaves Lansdown, said there was little prospect of further interest rate rises now that the central bank was concerned about a downturn in the economy.

“With little momentum in the economy and plenty of risk that the hike in borrowing costs will take a greater toll during the months to come, Bank of England policymakers look set to keep the pause button held on interest rate hikes,” she said.

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