Markets on red alert over interest rate rise after UK inflation ‘above 5 percent’ warning

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Bank of England chief economist Huw Pill said the UK’s central bank will have to make a “live” decision on interest rates at a coming meeting in November. However, Mr Pill added a coming interest rate rise would be “finely balanced”. Mr Pill also spoke about the possibility of sharp price rises expected later this year and early 2022 after markets factor in a rise in interest rates.

Speaking to the Financial Times, he said: “I would not be shocked, let’s put it that way if we see an inflation print close to or above 5 percent in the months ahead.

“And that’s a very uncomfortable place for a central bank with an inflation target of 2 percent to be.”

Mr Pill said that markets no loner needed to have interest rates at the historic low of 0.1 percent.

He added: “The big picture is, I think, there are reasons that we don’t need the emergency settings of policy that we saw after the intensification of the pandemic.

“The settings of monetary policy that we now have are supportive settings.

“The need for support has diminished, as this policy bridge to the other side of the pandemic has been built and largely traversed.”

Mr Pill was cautious to state that interest rates would not move higher than the 0.75 percent level that existed before the COVID-19 pandemic.

He said: “We do not see, given the transitory nature of what we’re seeing in inflation in our base case, a need to go to a restrictive[policy stance.”

The repeated hints from the Bank of England that an interest rate rise is imminent as led to lenders retracting the best mortgage deals that they usually offer.

Deputy economics editor at the Daily Telegraph Tim Wallace described how British “policymakers are cheerily discussing the prospect of a hike in interest rates which could come the week after next”.

This has made the market pre-empt an interest rate rise and factor it in when pricing products.

Financial markets seem to have already priced in the interest rate rise.

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The sector has factored in a forecast of a 0.25 percent for November 4 plus more increases to 1 percent or higher by the end of 2022.

Banks routinely price their loans from financial markets causing them to follow financial markets and factor in a forecasted interest rate rise.

Banks including Barclays, NatWest, HSBC and Platform, part of the Co-operative Bank, have raised interest rates on some of their best loan options.

The hints at a coming interest rate rise were also reinforced by Andrew Bailey, the governor of the Bank of England.

Mr Baily in a message last Sunday warned he “will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations”.

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