Mortgage holders facing rocketing monthly costs have been offered some rare good news after economists told i that the Bank of England is unlikely to increase interest rates when its Monetary Policy Committee (MPC) meets next month, despite inflation stubbornly holding at 6.7 per cent.
Last month, the MPC opted to hold rates at 5.25 per cent after 14 consecutive increases, although four members of the nine on the committee voted for a rise.
But five out of six experts on i’s panel of economists have said inflation holding steady in the latest round of data is unlikely to tip the balance in favour of another rise.
The predictions will offer particular relief to those with variable and tracker mortgage deals who would immediately see increased bills if rates were hiked.
And brokers have suggested to i that on current trajectories, some fixed-rate deals could reach 4.5 per cent this year, which will be positive news for those who are seeing their deals end in the coming months.
However, the economists have also cautioned that an escalating situation in the Middle East could have an impact on inflation because of the effect on oil prices, which would cause a huge dilemma for Andrew Bailey and the Bank’s economists, but is not a significant problem yet.
Although Israel is not an oil producer, the region is a key player to global supplies and there are suggestions that if Iran – which has a history of support for Hamas – were to become more embroiled in the conflict, then global prices of the commodity could increase.
Edward Jones, economics professor at Bangor University, said that although the battle with inflation was not over, a small downwards movement in core inflation – which is a good predictor of the future path of inflation and strips out energy and food prices – from 6.2 to 6.1 per cent was good news.
“If I had to bet, I’d suspect they’ll keep rates where they are for now, though things can change quickly. For now, inflation in Europe is not hugely affected by what is going on in the Middle East, but if it escalates and has an impact on oil costs, then the Bank of England has a tough decision to make,” he said.
Andrew Sentance, a former MPC member and now senior adviser at Cambridge Econometrics said he expected the MPC to vote for a hold in November.
“I think the latest inflation numbers won’t sway those who voted for a rate hold. I think they will see the pause in falling inflation as temporary. Indeed, Sarah Breeden will join the MPC in place of Sir Jon Cunliffe in November and Sir John was one of the dissenting hawks in September. Breeden is more likely to vote with the Governor and the others who want to hold rates. That would take the hold vote to 6-3,” he said, though he added if he were on the MPC he would personally vote to hike rates to counter “the stickiness” of inflation.
Michael Saunders, a former MPC member and now adviser at Oxford Economics, said: “I expect them to hold rates in November, based on the data so far. The economy is flat, employment is flat or falling slightly, most guides indicate that pay growth is slowing and interest rates already are at a restrictive level.
“They won’t cut quickly, because pay growth and core inflation are still relatively high, but as things stand they are unlikely to hike further. We are the top of Table Mountain.”
And Michael McMahon, a professor of economics at the University of Oxford, said that although inflation had stayed high, this was “not strong enough to offset the reason to wait [and keep rates at their current level for now], which is that a lot has been done and the effects are still coming through”.
Stephen Yiu, lead manager of the Blue Whale Growth Fund, said he expected the Bank to hold rates, but said that at their current level, interest rates would not get inflation down to the 2 per cent target any time soon.
“We may well be the last country in the G7 to reach that rate,” he said.
Some economists have said they think the Bank of England will narrowly vote to up rates however. Willem Buiter, another ex-MPC member, said he believed a five to four vote in favor of a 0.25 percentage rise is the most likely outcome, “because annual average regular pay growth shows few signs of coming down”.
Experts have warned that any escalation in tensions in the Middle East could have an affect on oil prices, which would feed in to inflation through effects on fuel costs and on organisations’ production bills.
Ken Wattrett, vice president of global economics at S&P Global Intelligence, told i a “major escalation” of the conflict and a surge in crude oil prices “would create a major dilemma for central banks around the globe”.
“The direct effect of a sustained jump in oil prices would rapidly push headline inflation rates upwards,” he added.
But others cautioned that the rise would have to be dramatic in order to affect inflation.
Ashley Webb, an economist at Capital Economics, told i models suggested that if oil prices were to rise to $110 (£91) per barrel then Consumer Prices Index inflation would still be 5.1 per cent or above in December 2023 – as opposed to 4.8 per cent on current projections.
Prices are currently at around $90 per barrel and have not increased drastically this week.
Expect the Bank of England to hold: Edward Jones, Michael McMahon, Michael Saunders, Stephen Yiu, Andrew Sentance
Expect the Bank of England to up rates: Willem Buiter
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