Bank of England set to deliver another 0.5% rate hike next month

The Bank of England will deliver another 0.5 percentage point increase in interest rates next month as it steps up its fight against inflation, experts warn.

In a further blow to households dealing with higher borrowing costs, a Reuters poll found 30 of 51 economists expect rates to jump from 1.75 per cent to 2.25 per cent in September. 

The other 21 forecast a more modest 0.25 percentage point rise to 2 per cent. Earlier this month, the Bank raised rates by 0.5 percentage points from 1.25 per cent to 1.75 per cent – the biggest increase in 27 years.

Inflation fight: Last week, the Bank raised rates by 0.5 percentage points from 1.25 per cent to 1.75 per cent – the biggest increase in 27 years.

It has raised rates from record lows of 0.1 per cent in December as it battles runaway inflation.

Inflation hit a 40-year high of 9.4 per cent in June and official figures tomorrow are likely to show it close to 10 per cent in July.

The Bank believes it will top 13 per cent this autumn as energy bills soar.

But there are fears the battle to tame inflation – and return it to the 2 per cent target – will tip the economy into recession as higher interest rates hit spending and investment.

Official figures last week showed the economy contracted by 0.1 per cent in the second quarter of the year.

A further decline in the third quarter would mean the UK is in recession. 

‘With growth slowing, it is tempting to assume the Bank will be thinking of hitting the brakes, and could even be cutting rates within the next year,’ said Elizabeth Martins, an economist at HSBC. 

‘But for now at least, the problems are supply and inflation driven – allowing inflation to rise even further risks only making the situation worse.’

Data released by the Office for National Statistics on Tuesday bolstered the case for a 50 percentage point rate hike. 

The ONS said the UK job market added 160,000 new positions in the three months to June, well under expectations of over 250,000, but wages were rising.

Thomas Pugh, economist at audit, tax and consulting firm RSM UK, said: ‘The leap in regular pay growth to 4.7 per cent in June, which is miles above the 3-3.5 per cent that’s consistent with the 2 per cent inflation target, significantly raises the chances that the MPC will go for a second 50bps rise in interest rates in September.

‘Admittedly, total wage growth fell from 6.4 per cent [year on year] in the three months to May to 5.1 per cent in June as bonus payments growth dropped to 10.4 per cent. 

‘But bonus payments have been volatile lately and the MPC prefers to look at underlying pay growth, which rose strongly. 

‘Indeed, pay growth rose rapidly in every industry except for the public sector. 

‘Add in employment growth of 160,000 and it paints a picture of a very tight labour market. 

‘Combine this with soaring inflation, which is likely to have reached almost 10 per cent in July, and we think a 50bps hike next month is now more likely than not.’