UK homeowners hope the Bank of England will avoid another rate hike after inflation falls

LONDON – Homeowners across the United Kingdom are hoping the Bank of England will decide to avoid raising interest rates on Thursday for the first time in almost two years, a decision that would come on the heels of similar action by the Federal Reserve. of the United States.

Following Wednesday’s news that UK inflation unexpectedly fell in August to 6.7%, its lowest level since the Russian invasion UkraineExpectations have risen that the Bank of England will opt to keep its main interest rate unchanged at a 15-year high of 5.25%.

Before the inflation figures were released, most economists thought the central bank would raise its key interest rate once again by a quarter percentage point to 5.5%. This is because inflation is still well above the bank’s target rate of 2% and higher than in any other major Group of Seven economy.

Now, financial markets predict that the decision will go in either direction.

Even if there is a rate increase, economists expect the bank to signal that borrowing rates have peaked, to the relief of millions of homeowners facing higher mortgage rates.

Central banks around the world appear to be near the end of an aggressive rate-hiking cycle aimed at curbing a burst of inflation sparked by the recovery from the COVID-19 pandemic and Russia’s war in Ukraine. The US Federal Reserve left rates unchanged on Wednesday.

Suren Thiru, economic director at chartered accountancy group ICAEW, said raising interest rates in the UK would be a “misstep” following the surprise drop in inflation.

“Although interest rates will likely rise on Thursday, unnecessary further tightening risks exacerbating the financial struggles facing households and businesses, given the long lag between rate hikes and their impact on the real economy,” said.

For many homeowners, the pain hasn’t come yet. Unlike in the United States, for example, most homeowners in Britain lock in mortgage rates for only a few years, so those whose contracts expire soon know they face much higher borrowing costs in light of the sharp increase in interest rates in the last two years. years.

Like other central banks around the world, the Bank of England has aggressively raised interest rates from near zero, in a bid to counter price increases first fueled by supply chain problems during the coronavirus pandemic and then the Russian invasion of Ukraine, which raised food and energy costs. UK inflation peaked at 11.1% in October 2022.

As inflation has eased, the cycle of increases appears to be coming to an end.

The Swiss National Bank joined the Federal Reserve in keeping rates steady on Thursday, but on a busy day for central bank action in Europe, the central banks of Sweden and Norway pressed ahead with quarter-point increases. .

The European Central Bank, which sets interest rates for the 20 European Union countries that use the euro, hinted last week that its 10th consecutive increase could be its last.