Bank of England Rate Decision Hinges on Fragile Economy and Rising Costs

As the Bank of England prepares to make its next interest rate decision, analysts are divided on whether to raise rates or hold steady. Danni Hewson, head of financial analysis at AJ Bell, notes that a pre-emptive strike could be seen as a gamble by the bank's rate setters.

The UK economy is still fragile, and a hike in interest rates could cause unnecessary pain, stalling growth and adding to difficulties faced by those struggling to find work. On the other hand, rising costs, particularly energy and food prices, may become entrenched if employers feel boxed into offering inflation-busting pay increases.

Financial markets are still pricing in a rate hike by the end of the year, but sentiment has shifted as many times as oil price fluctuations. The next move could well be a cut, with rates already restrictively high and consumers facing ongoing pressure from higher mortgage payments, elevated taxes, and weakening real wage growth.

For savers and mortgage borrowers, a hold on interest rates may not necessarily mean an end to rate rises. Fixed deals depend on rate expectations, which feed into gilt yields driving swap markets where these rates are set. Gilt yields have soared, putting upwards pressure on fixed rates.