Interest rates expected to rise to highest level in 13 years

The Bank of England is widely predicted to increase its base rate from 1%, already the highest in 13 years, to 1.25%.

It would be the first time since January 2009 that the rate has been higher than 1%.

The nine-person Monetary Policy Committee (MPC), which sets the rate, will announce its decision on Thursday.

They will want to rein in inflation, which has hit highs not seen for decades.

“The Bank of England faces a stern test of its mettle at the next interest rate decision, and any hesitation is likely to result in the pound being punished on the currency markets,” said Laith Khalaf, head of investment analysis, AJ Bell.

Such a drop would mean that the price of petrol and diesel, and other imports that the UK pays for in dollars, would rise.

This month the average price of filing a family car topped £100 for the first time.

Any further jump is unlikely to be welcomed by drivers.

There are many indications that the Bank might hike rates.

The MPC has voted for a rise in each of the last four meetings, in December, February, March and May.

Last time three out of nine members of the Monetary Policy Committee already voted for rates to be set at 1.25%.

However some things have changed since then. The UK economy looks set to struggle, with an OECD forecast predicting it will be the weakest in the Group of Seven (G7) next year.

“By raising interest rates, the Bank is putting the brakes on an economy that is already slowing of its own accord.

“That risks the economy stalling, or worse, going into reverse.” Mr Khalaf said.

The Bank has been given a little more wriggle room by the Chancellor, who is set to funnel billions to struggling households to help them deal with soaring energy bills.

An interest rate raise will eat away at some of this handout, because the cost of borrowing will go up for homeowners.

But equally drivers would suffer if rates are maintained and savers will benefit from a hike.

People are certainly expecting rises to come. According to a survey commissioned by the Bank of England and performed by Ipsos in early May, 70% of people expect rates to rise over the next 12 months.

The survey, released on Friday, showed that 28% thought a rate rise would benefit the economy, 22% said the same about a drop, and 28% want them to remain at current levels.

Some in the market also think the Bank might go further than the rise to 1.25% and bring rates directly to 1.5% or a rise of 50 basis points (bps).

Allan Monks at JP Morgan said: “We continue to think the MPC will stick to frequent steps of 25bps as it remains concerned about recession as well as inflation risks.”