Rates hike ahead but Northern Ireland economist Esmond Birnie thinks things could have been a lot worse

The decision will pile more pressure on already-strained borrowers, but with inflation beginning to edge back down off its highs, economists say there is a glimmer of hope in the economy's more distant future.

Northern Ireland economist Esmond Birnie thinks things could have been a lot worse.

He said: “There is some degree of optimism that where they are heading towards is going to be a bit lower than what it would have been.

“The current rate is 3.5%, a further increase of 0.25% is quite likely, 0.5% is less likely.

“The inflation rate has begun to decline, a bit of pressure is off the Bank of England, but having said that given that inflation is still above 10% roughly speaking and their target is only 2%, they’ve got a way to go.

"I would stick with what I’ve said, and other commentators have said at the end of last year, that further increases are in the pipeline but it maybe won’t be quite as rough for borrowers, particularly mortgage holders, in the medium longer run as it could have been.

"Things have stabilised, got a bit more settled after the very difficult period back in September and October under the previous prime minister and chancellor.”

He continued: “Of course there’s no certainty in any of this, a lot depends on the world economy in terms of energy prices – believe it or not things have turned out much better, though it’s still very challenging for a lot of people with the cost of living, but in terms of energy things could have been a lot worse.

"We should be thankful so far, apart from the snow last week, that Europe has had a fairly mild winter, so the demand on oil and gas has not been as high as it could have been.

“If things stay the way they have been interest rates are likely to peak at 4.5% and then come down a bit.

"It’s still tough, particularly if you’re in the early or middle stages of paying off a mortgage or other debt, but the slight silver lining is it could have been a lot worse under different circumstances.”

Markets think the Bank's monetary policy committee will raise interest rates to 4% on Thursday, from the current rate of 3.5%. Investec Economics, on the other hand, anticipated a smaller rate hike that would take it to 3.75%.

It is expected by some experts to be the penultimate base rate rise before rates peak at 4.5% or 4.25%, and then fall back down.

In December 2021 the base rate stood at just 0.1% as the policymakers tried to encourage consumer spending after Covid slowed down the economy.

But efforts to control inflation and bring it back down to the Bank's 2% target has led the Bank to tighten monetary policy since.

AJ Bell analyst Laith Khalaf said that a lot has changed since the last MPC meeting, including the fall in gas prices, which will make the committee "think twice about pushing rates up too much".