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1.5m homeowners on variable rate mortgages face new rise

Almost 1.5 million homeowners with variable-rate mortgages face higher borrowing costs, with the Bank of England expected to push up interest rates on Thursday to 4.5%.

City analysts polled by Refinitiv were unanimous in forecasting the central bank would increase its base rate by 0.25 percentage points when policymakers meet to tackle Britain’s stubbornly high inflation rate.

Another 1.5 million households with fixed-rate mortgages will see their annual bills spiral by an average of £3,000 when they refinance their mortgages this year after the average two-year fixed rate jumped from below 2% to 4.75% over the past 18 months.

The near certainty of a 12th consecutive increase follows a series of speeches by central bank policymakers arguing for higher mortgages costs to bring down the highest inflation rates in 40 years to more sustainable levels.

“It is tough to see the Bank of England doing anything else,” said George Buckley, chief UK economist at Nomura. “According to the markets, there is only a 4% chance of them holding rates where they are.”

In March, the consumer prices index (CPI) dipped slightly to 10.1%, down from 10.4% in February – higher than the 7% inflation rate in the 20-member euro currency bloc and 4.9% in the US.

While the BoE’s monetary policy committee (MPC) has forecast a drop in inflation to below 1% in two years based on the current level of interest rates, it has argued that progress is too slow.

In a recent speech, chief economist Huw Pill urged British households to restrain pay demands and businesses from hiking prices, saying they “need to accept” they are poorer.

Pill said a game of “pass the parcel” was taking place in the economy – as households and companies tried to pass on their higher costs.

Most analysts believe inflation will tumble by the end of the year to below 5%, dragged lower by falling food and energy prices. These forecasts show inflation sliding from 2024 to below the central bank’s 2% target.

However, many economists have argued that core inflation, which strips out volatile elements such as energy and food, has remained “sticky” and could spur the BoE to continue pushing interest rates higher this summer.

Goldman Sachs has warned a more sustained level of core inflation could force the BoE to push its base rate as high as 5% during the summer.

Buckley said a split on the nine-strong MPC was likely, repeating last month’s vote when Silvana Tenreyro and Swati Dhingra, both on secondment from the London School of Economics, voted against a rise, saying higher borrowing costs would prompt a more significant slowdown than expected, plunging the UK into a recession and bringing forward the point at which rate cuts would be required.

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