Bank of England to raise interest rates to 1.25 percent in war on inflation

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It is widely predicted the Monetary Policy Committee will recommend an increase in the base rate to 1.25 percent, the first time since January 2009 that it has been above one percent.

The move will be an attempt to rein in inflation, which hit nine percent in April – a high not seen for decades.

Laith Khalaf, head of investment analysis at AJ Bell, said: “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.”

Such a drop in sterling would force up the price of fuel and other imports that the UK pays for in dollars. The average price of filling up a family car has topped £100 for the first time.

The MPC has voted for a rise in each of the last four meetings, in December, February, March and May. Last time three of the nine members voted for rates to be lifted then to 1.25 percent.

Since that meeting, forecasts for the UK economy have not been favourable with the Organisation for Economic Co-operation and Development predicting it will be the weakest in the G7 next year. Mr Khalaf added: “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.”

The Bank has been given a little more wriggle room by Chancellor Rishi Sunak, who plans to funnel billions of pounds to households to help them deal with soaring energy bills.

An interest rate raise will eat away at some of this handout as the cost of borrowing rises, though savers would benefit. But equally, drivers will suffer if the base rate is unchanged.

Some 70 percent of people expect rates to rise over the next 12 months, according to a survey carried out by Ipsos last month for the Bank of England.

The research also showed 28 percent believe a rate rise would benefit the economy, 22 percent said the same about a drop, and 28 percent want the one percent figure to remain.

Some experts think the Bank should set the rate directly at 1.5 percent, or a rise of 50 basis points.

Allan Monks at JP Morgan said: “There is a plausible outside chance of this being delivered but we continue to think the MPC will stick to frequent steps of 25bps.”

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