Investors predict that UK interest rates will rise to 6.5 percent by March of next year, the highest since 1998. This will cause mortgage borrowers even more hardship.
In recent weeks, the peak of UK interest rate prices on swaps markets have risen dramatically. From 5% in May to 6,25 % following Bank of England’s surprise decision to increase interest rates in June to 5%.
“There is a self-feeding dynamics here. . . But it’s still not panic,” said Peter Schaffrik economist at RBC Capital Markets.
As rates rise, people who believed yesterday that they were too high must give up and let rates increase. Bank of England Governor Andrew Bailey said to the BBC on Friday that he wants to “get inflation back to where it should be” and then we will be able to assess what interest rate level to set for future.
Bailey continued, “I am very aware of the challenges that people face.” “Unfortunately, this is the way we must reduce inflation. “If we don’t bring down inflation, it will get worse and we will have to raise interest rates even more.”
Imogen Bachra is the head of UK Rates Strategy at NatWest. She said that this was taken by the market as “greenlight to price in even more rate increases”.
In the year ending May, headline prices increased 8.7 percent, while core inflation, which excludes volatile food and fuel prices, and is seen as a more accurate indicator of price pressures at underlying levels, rose ahead of expectations, to 7.1%.
The benchmark two-year gilt yields rose by 0.08 percentage points to 5.46 percent on Thursday, their highest level since 2008. The average fixed-rate UK mortgage has increased to over 6 percent.
JPMorgan’s Allan Monks wrote in a client note last week that the BoE might be forced to raise rates to as high as 7% if inflation is even more stubborn than anticipated. However, his main expectation was that rates would reach 5.75% in November.
Sterling has been weakening in recent weeks despite rising rate expectations. From a high of 1.2838 percent in June, to $1.2708 per cent on Thursday.
Analysts have highlighted this as being a cause for concern, because sterling should strengthen in an environment of rising interest rates expectations compared to other countries. The UK will likely increase interest rates more than both the Federal Reserve Bank and the European Central Bank.
Lyn Graham Taylor, senior strategist at Rabobank, stated that sterling has not strengthened because “rate increases are not a result of economic strength – they are the result of UK inflation being higher than in other countries”.
It’s a lot of uncertainty about the future.