British borrowers face a rising chance of higher interest rates in November, with three Bank of England policymakers already voting for a hike and gilt yields near 2008 levels.
For households, the squeeze has already started. Swap rates, which lenders use to price fixed-rate mortgages, have risen since the Middle East conflict began, pushing fixed mortgage rates up before any formal rate move. Variable-rate borrowers would pay more immediately if the Bank raises its rate.
The Bank’s Monetary Policy Committee held Bank Rate at 3.75% on September 17 by a 6-3 vote. Megan Greene, Catherine Mann and Huw Pill voted for an immediate rise to 4%, repeating the split from July. The Bank warned that rates may need to rise if the conflict drags on and keeps energy prices high. Governor Andrew Bailey said that while higher global energy costs had so far had limited spillover into UK prices and pay, prolonged turbulence would probably require higher rates to bring inflation back to 2%.
Inflation is moving the wrong way. Consumer prices rose 3.1% in the year to August, up from 2.9% in July. The Bank’s next decision, on November 5, will come with fresh forecasts, and forecast meetings are where changes of direction tend to be signalled.
The committee is not united. External member Alan Taylor argued in the minutes that further tightening is not yet warranted. He said policy is already restrictive and that market interest rates for two years and beyond now sit higher than at the final hike of the 2022-23 cycle, when inflation was 6.8%.
Economists are split too. ING’s James Smith expects no hike this year and cuts to resume in 2027, while Capital Economics’ Paul Dales says the Middle East conflict and higher energy prices have raised the chances of a rise.
The pressure on government bonds is adding to the uncertainty. According to deVere Group, the 10-year gilt yield climbed to 5.38% on Thursday, close to last week’s peak, as a global sell-off pushed the 30-year US Treasury yield to its highest since 2004. Nigel Green, deVere’s chief executive, argued that “Britain’s budget is being written in the bond market right now.”
Chancellor John Healey presents his Budget on October 28, and rising yields have already eaten into the room he has under his fiscal rules. The Office for Budget Responsibility builds market interest rates into its forecast but has not said which dates’ prices it will use, so the current turbulence could end up locked into the Budget arithmetic.
