Ross Clark Ross Clark

How high might interest rates go?

To nobody’s surprise, the Bank of England has hiked its base rate, and, equally unsurprisingly, it has chosen to do so by a relatively modest 0.25 per cent, bringing rates to 1.25 per cent. In 25 years of its existence, the Monetary Policy Committee (MPC) has never raised rates by more than 0.25 per cent at a time. That stands in contrast to the Fed’s decision to raise rates by 0.75 per cent on Wednesday.

If the modesty of the rise was supposed to calm markets, however, it doesn’t seem to have worked. The FTSE100, already down nearly 2 per cent on the day, plunged further on the announcement. The greater worry now must be whether the Bank, having failed completely to see the inflationary surge coming last year, is now falling even further behind the curve in trying to tackle it.

Could homebuyers cope if mortgage rates were to be jacked up to over 10 per cent?

How high could they go? As you can see from the graph, back in February markets expected rates to peak at 1.5 per cent. Now they foresee them reaching 3.5 per cent. But here is a statistic that anyone under the age of 50 will find shocking, even incomprehensible. The last time that the Retail Prices Index (RPI) was at the level it is now – 11 per cent – the Bank of England’s base rate was 13.8 per cent. 

That gives a foretaste of what we might get to experience in the coming years if inflation does not fall quickly. Chancellors of the Exchequer (who set rates before Gordon Brown made the Bank of England independent in 1997) did not start out this way – in a bout of inflation in 1952, when the RPI also topped 11 per cent, the Bank of England’s base rate never got above 4 per cent.

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