0:05 AM, 2nd June 2023, About 6 months ago 3
A leading Wall Street investment bank has issued a warning that the Bank of England will need to raise interest rates to their highest level in more than 15 years to combat persistent inflation.
According to researchers at Goldman Sachs, inflation is expected to remain above the central bank’s 2% target until at least 2026 due to businesses continuing to pass on wage and cost increases.
To address this issue, Bank Governor Andrew Bailey and his team are predicted to increase borrowing costs three times this year, from its current 4.5% level to 5.25% – the highest rate since February 2008.
This cycle of 15 consecutive rate hikes since December 2021 would be one of the longest and most stringent in the Bank’s history.
Hundreds of mortgage products for buy to let and residential borrowers have already been removed from the market as lenders race to reprice their offerings.
The bold move could potentially outpace the US Federal Reserve’s tightening cycle, which has seen borrowing costs rise to a range of 5% to 5.25%. The Fed is expected to end its rate increases at its upcoming meeting.
Goldman Sachs analysts agree with recent Bank of England assessments and say that high inflation has been a primary driver in wage growth as workers negotiate to combat rising bills.
Inflation has steadily eroded workers’ wages for almost two years, prompting demands for pay raises to maintain living standards.
Also, employers have been increasing their starting pay to attract new staff amid an exodus of workers from the job market and high nominal wage increases.
Recent data from the Office for National Statistics revealed that headline inflation dropped to 8.7% over the year to April, down from 10.1%.
However, this decline was slower than anticipated by the Bank and the City.
Core inflation, a more precise measure of underlying price pressures, unexpectedly rose to 6.8% from 6.2% – its highest level in over three decades. Services inflation also increased to 6.9%.
These surprising jumps have led markets and economists to revise their peak interest rate forecasts to between 5.25% and 5.5%.
Goldman Sachs believes that “persistent inflationary pressures will push the MPC (Monetary Policy Committee) towards more tightening.”
Rightmove’s mortgage expert Matt Smith says: “In the past week we’ve seen average mortgage rates creep up across the majority of fixed-rate products as we see lenders react to higher-than-anticipated inflation figures.
“There’s also been a withdrawal of some mortgage products from the market, and these two factors may be understandably concerning to those thinking of taking out a mortgage soon.”
“If we dig beneath the headlines, the majority of the products withdrawn so far are from smaller lenders with higher rate products in the 90% and 85% loan-to-value brackets, with not much further movement from bigger lenders yet following the end of last week.
“This is why the average mortgage rate has actually edged downwards in some of the smaller deposit products compared to last week.”
He added: “It will likely take some weeks for the full effect of the latest inflation figures to impact the mortgage market, and we will get a better sense of the direction of travel when there is more movement from bigger lenders.”