Homeowners and housing market on watch for signs of peak rates into Bank of England hike

Mortgage holders across London are bracing for the Bank of England’s first decision on interest rates of 2023, in a move this week that will set the tone for the housing market and consumer spending into the rest of the year.

Decision makers in Threadneedle Street will join a busy run of action for major central banks, with the announcement due at high noon on Thursday. It will affect the repayments of thousands on variable rate home loans.

Most City experts expect the BoE’s Monetary Policy Committee to hike the base rate by 0.50% for the second meeting in a row, taking the rate to 4.0%. Much attention will also focus on the likely peak to BoE rates, where there is less agreement among economists, who are mainly split between 4.25% or 4.50%, probably reached around March.

James Smith, developed market economist at Dutch bank ING, predicts a 0.50% hike next, but adds that such a move is “likely to be the last” of that size, with “much of the impact” of last year’s action “yet to hit.”

He adds: “Cracks are forming in interest-rate-sensitive parts of the economy. Headline inflation should begin to come down more rapidly from March too, as the impact of last year’s energy bill surges drop out, and core goods/food pressure begins to ease more noticeably.”

The BoE has not shied away from voicing its commitment to bringing double-digit inflation back down toward its official 2% target. All eyes will be watching out for any clues that the MPC’s thinking whether the runaway pace of price rises has peaked, in a complex picture for inflation. While wholesale gas prices are falling back, and consumers are protected by the government’s Energy Price Guarantee, there have also been numbers out this week showing a record high for grocery inflation.

Meanwhile, with the UK gripped by the biggest outbreak of strike action among the labour force in decades, the MPC will also be on watch for signs that high inflation is becoming embedded in the UK, at a time when the country’s jobs market remains tight. It will also have to factor in worries about recession. The British economy is the only one among the G7 club of major nations that the International Monetary Fund expects to shrink this year. The BoE itself currently forecasts a recession that will outlast 2023, although it will also update its outlook after a run of economic data that looked less bleak than feared.

The decision on rates will come before the European Central Bank’s equivalent Thursday move at 1.15 p.m. and follows the Federal Reserve’s for the US, due overnight on Wednesday. The ECB is expected to back a 0.50% rise, with the Federal Reserve set to go for 0.25%.

Hopes have grown among global rate-setters that their programme of tighter rates is having the desired effect in taming inflation, not least as the shockwaves ease in global energy markets, as they adjust to  Russia’s war on Ukraine.