‘Stop panicking!’ BoE urged to calm down on interest rate hikes or trigger recession | Personal Finance | Finance

They insist the BoE’s monetary policy committee (MPC) must take a breather and give existing rate hikes time to work, rather than piling more pain on hard-pressed borrowers.

Markets fear that last week’s shock base rate hike to five percent is unlikely to be the last.

Analysts at NatWest forecast that rates will hit a thumping six percent by year end, following the MPC’s “hawkish hike” on Thursday.

The BoE has hiked base rates at 13 successive meetings since December 2021, as it battles to make up lost ground in the fight against inflation.

The subsequent mortgage crunch could hit 2.5million borrowers over the next year, who face paying hundreds of pounds more every month when their low-cost fixed-rate mortgages expire.

Markets expect the MPC to vote through another 0.5 percent hike in August to 5.5 percent. Then it’s expected to hike by 0.25 percent in both September and November, taking rates to six percent by year end.

Today, Chancellor Jeremy Hunt repeated his view that the pain is a price homeowners must pay to defeat inflation.

Yet analysts are warning that the BoE’s aggressive monetary stance risks overkill as inflation is showing signs of turning.

While in the UK prices grew 8.7 percent in the year to May, the same as in April, it has fallen to just 4.1 per cent in the US. Forecasters reckon US inflation could fall to just 3.1 percent in June.

This trend will eventually feed through to the UK, with Samuel Tombs, chief UK economist at Pantheon Macroeconomics, predicting headline consumer price inflation will fall to 4.5 percent by the end of the year.

He reckons it will continue sliding towards 2 percent in the second half of 2024.

UK inflation has entered a new phase with core inflation now being driven upwards by strong pay growth rather than energy costs, said Andrew Goodwin, chief UK economist at Oxford Economics.

He expects the BoE to keep hiking until it sees clear evidence that wage growth and services inflation are cooling but warns the results will hurt. “The risk is that the BoE overtightens policy is very real, and a recession in 2024 now looks more likely.”

The BoE is overdoing things in a bid to restore its lost credibility, said Julian Jessop, economics fellow at The Institute of Economic Affairs. “The full impact of previous rate increases has yet to be felt and there are still good reasons to expect inflation to fall sharply over the remainder of the year.”

Mortgage broker Andrew Montlake at Coreco Group said the BoE must give previous rises time to work and resist the temptation to hike rates for the 14th meeting in a row in August. “Why panic now? Going any further than five percent before taking a pause would be crazy.”

Political economist Richard Murphy said the Bank of England has just made the worst possible decision on interest rates. “This will sink millions of households and drive the economy into recession.”

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Rising interest rates are the traditional method of fighting inflation as higher borrowing costs make consumers and businesses feel poorer, hitting demand.

Yet Duncan Lamont, head of the strategic research unit at fund manager Schroders, said hiking does not work as well as it did.

The percentage of households that own their home outright with no mortgage has shot up in the past decade, as younger people struggle to get on the property ladder while older owners have mostly paid off their home loans.

Lamont said higher borrowing costs make no difference to them. “This means the BoE has to smash that monetary policy hammer much harder to impact demand.”

Josh Ryan-Collins, associate professor in economics & finance at the UCL Institute for Innovation and Public Purpose, said MPC notes “reveal how much uncertainty there is about future path of inflation and that existing rate hikes are yet to have transmitted through to the economy”.

Despite this, the BoE is pressing ahead to atone for its own blunders, and we all look set to pay the price.

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