The Bank of England is widely anticipated to increase interest rates this week, adding further pressure on households already grappling with rising inflation. Traders and economists largely expect the central bank to raise the base rate from 3.75% to 4%, marking the first such increase since August 2023.
This move comes as recent data shows the UK's Consumer Prices Index (CPI) inflation rose to 3.5% in September, its highest level in 11 months. The increase is attributed in part to rising energy costs, exacerbated by geopolitical tensions in the Middle East, and the continued resilience of the economy.
Economists note that the Monetary Policy Committee has been hesitant to raise rates, with some members expressing caution due to concerns about the labor market's fragility. However, the current inflation figures and market expectations suggest a rate hike is highly probable.
While some foresee this as a singular increase, with potential rate cuts by late 2027 or 2028 if energy prices fall, others, including Deutsche Bank and Morgan Stanley, predict further rate rises in early 2027, potentially bringing the base rate to 4.25%.
The Bank will also release updated economic and inflation forecasts. The Office for Budget Responsibility (OBR) has projected inflation could climb to nearly 4% by early 2027, with significant increases anticipated in the costs of essentials like food and fuel. The OBR forecasts that mortgage payments could consume 4.3% of household disposable income by 2031, a level not seen since 2009.
For mortgage borrowers, the expected rate hike, though largely priced in by lenders, could mean higher costs when fixed-rate deals expire. Data indicates that 2.3 million fixed-rate mortgage deals are set to end this year. While some lenders have recently trimmed mortgage rates amid a sluggish housing market, the overall trend suggests increased borrowing costs.
Savers, however, may see a benefit, as typically savings rates rise in tandem with the base rate. Those with savings accounts could expect to see higher interest rates, although tax implications on savings interest are also set to change in April 2027.