Bank of England HOLDS rates of interest at 3.75% as debtors brace for HIKE in months

The Bank of England left interest rates unchanged today as war in the Middle East fuelled fears of an energy price inflation shock.

In a brutal setback for millions of borrowers desperate for cheaper mortgages, the central bank held rates steady at 3.75 per cent.

And it is feared the Bank could be forced to raise interest rates next month as the soaring price of oil and gas set the scene for ‘Trumpflation’ to explode.

Bets on financial markets indicate there is a 55 per cent chance of a rate hike in April.

That would spell misery for millions of borrowers hoping for cheaper mortgages.

And analysts warned higher rates would weaken an already floundering economy with official figures today showing unemployment already at a five-year high of 5.2 per cent and youth unemployment of 14.5 per cent – a level not seen since early 2015.

Under pressure: Bank of England governor Andrew Bailey faces inflation headache

Thomas Pugh, chief economist at consulting firm RSM UK, warned inflation could hit 5 per cent as a result of soaring oil and gas prices.

‘At that point, interest rate hikes become much more likely,’ he said.

Joe Nellis, an economic adviser at accountancy firm MHA, said: ‘Interest rates are unlikely to fall anytime soon and could even rise again.

‘The Bank has a tough balancing act on its hands, knowing that raising rates could hinder economic growth. But its main priority will always be stabilising prices. Policymakers will not be afraid to hike interest rates if necessary to prevent spiralling inflation.’

The crisis is a major headache for Bank of England governor Andrew Bailey as he battles to keep inflation under control without tipping the economy into recession.

Before the US-Israeli airstrikes on Iran less than three weeks ago, a rate cut in the UK today looked all but certain.

It looked set to be followed by at least one more this year, with the next move coming as early as next month.

But with oil and gas prices soaring, and Britain facing a fresh inflation shock, the chances of a rate cut anytime soon have all-but vanished.

Instead, financial markets are betting on a rate hike later this year, pushing up the cost of mortgages for millions of households.

Figures from Moneyfacts show the average two-year fixed mortgage deal stands at 5.3 per cent, the highest since February last year.

The annual cost of a typical two-year fix is now £788 higher than two weeks ago for a £250,000 loan over 25 years. The average five-year fix, at 5.35 per cent, is the highest since August 2024.

Almost all of the 500 sub-4 per cent deals available last week have been pulled, Moneyfacts said.

Adam French, its head of consumer finance, said: ‘The financial effects of ‘Trumpflation’ are hitting home as conflict in Iran is driving inflation concerns.

That has forced markets to rethink the outlook for cuts, pushing borrowing costs higher and prompting lenders to pull and reprice deals.

‘The window for ultra-competitive sub-4 per cent rates has been slammed shut.’

Central banks typically hike interest rates to tame rising inflation and cut them when inflation is back under control.

The Bank of England has cut interest rates six times since August 2024 – from 5.25 per cent to 3.75 per cent – and it was thought rates could fall as low as 3 per cent by the end of this year.

But the spike in oil and gas prices has pushed up the price of petrol at the pumps and looks set to add hundreds of pounds a year to household energy bills.

Businesses are also facing higher costs – with many raising prices in response.

This has left pre-war forecasts of inflation returning to the 2 per cent target this year from its current level of 3 per cent looking spectacularly optimistic.