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The Bank of England is poised to raise interest rates by the most since Black Wednesday on Thursday after the US Federal Reserve announced a steep increase in borrowing costs for an unprecedented fourth time.
The Fed’s decision to put up rates by 0.75 percentage points piles pressure on Andrew Bailey, the Governor of the Bank, to follow suit with a rise of the same scale in the UK.
A 0.75-point increase would take the Bank’s interest rate back to levels last reached in November 2008 – and drive up costs for millions of mortgage borrowers.
It would mark the Bank’s eighth consecutive rate rise, and its largest since policymakers scrambled to protect the pound on Black Wednesday in 1992.
The Bank had been expecting to announce its rates decision after an Autumn Statement by Jeremy Hunt, the Chancellor, setting out how he intends to plug a £40bn hole in the public finances.
The statement was meant to happen on Monday this week but has been delayed until mid-November. The Treasury is expected to be closely watching market reaction to the rates announcement, with a decision looming over potential cuts and ministers meeting to discuss the defence budget on Thursday.
Rishi Sunak and Mr Hunt are said to be planning an extension to the windfall tax on oil and gas firms to raise £40 billion over five years. They will increase the rate to 30 per cent and extend the levy until 2028, according to The Times.
It came as a senior executive at Nationwide, one of the country’s biggest mortgage lenders, suggested that house prices could drop as much as 30pc next year in the worst case if Britain is plunged into a protracted recession.
Markets expect the Bank’s rate-setters to vote for a 0.75 percentage point increase at its Monetary Policy Committee meeting, although they are yet to make a decision and some economists are calling for smaller or larger rises.
For homeowners with a £200,000 mortgage, this increase in interest would typically add £84 per month onto their payments, or just over £1,000 a year. This would impact mortgage holders on a variable rate or tracker instantly.
However, although it would lift the Bank’s base rate to rise to a 14-year high of 3pc, this would still be well behind the Fed, whose benchmark rate now targets a range of 3.75pc to 4pc following four straight 0.75-point increases.
On Wednesday the White House praised Fed chairman Jerome Powell for acting to control surging price growth, which typically slows down in response to higher interest rates.
Karine Jean-Pierre, the administration’s press secretary, said: “The Fed actions help bring inflation down.
“This is part of our transition to stable and steady growth.”
In Britain, it is feared that rising rates will spark a fall in house prices in the coming months.
Chris Rhodes, Nationwide’s chief financial officer, told MPs on the Treasury Select Committee that prices could sink as much as 30pc next year in a worst case scenario if the economic outlook deteriorates further, although many economists consider a drop on this scale very unlikely.
Mr Rhodes said: “There are clearly headwinds. We’ve talked about inflation, we’ve talked about energy costs…and clearly interest rates. The pressure is to the downside… my worst case scenario is potentially a 30pc fall.”
Nationwide’s latest figures showed that the average UK house price stood at £268,282 in October, meaning a drop on this scale would wipe more than £80,000 off the value of an average property.
This would represent a bigger crash than the one experienced after the 2008 financial crisis, when house prices plunged by 21pc.
City economists are split on how much Threadneedle Street must do to rein in inflation, which picked up to 10.1pc in September.
Bank of America economist Robert Wood said: “The UK will require considerable further monetary tightening.
“It has the worst of both worlds: high and persistent headline inflation due to energy prices and a very tight labour market due to rising long-term sickness.”
ING has argued that weakening economic data will tempt the Bank to opt for just a 0.5 percentage point rise, while Capital Economics expects a 1 percentage point increase.
Markets do not expect an increase as high as they were predicting last month, because the Chancellor Jeremy Hunt has reversed the bulk of his predecessor Kwasi Kwarteng’s mini-Budget.
There were fears that the scrapped tax rises would fuel inflation further, forcing the Bank into more drastic action on interest rates.
However, investors are still betting on the base rate peaking at over 4.5pc.
The Bank will also reveal new economic forecasts, with rate-setters predicting an inflationary peak of just under 11pc at its last meeting.
Nationwide’s best case scenario is that house prices “slowly increase” next year, Mr Rhodes said.
He added that the best and worst-case scenarios “are the two extremes which are tail probabilities”, adding that its central forecast was for prices to fall between 8-10pc in 2023.
Rival lenders Lloyds and NatWest last week said they expected house prices to drop between 7-8pc next year, as higher mortgage costs and squeezed household finances threaten to tip the market into a downturn.
In the US, Mr Powell hinted at more gentle rate rises soon as higher borrowing costs take effect.
He said: “The question of when to moderate the pace of increases is now much less important than the question of how high to raise rates.
“At some point, it will become appropriate to slow the pace of increases. That time is coming and it may come as soon as the next meeting or the next one after that.
“We will stay the course until the job is done.”
Source:Simon Foy, Tom Rees,The Telegraph