Interest rate HIKE warning: Bank of England poised to make change as redundancies hit low

Andy Webb warns banks' interest rate rises may not be beneficial

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After much speculation the central bank voted in December to increase the base rate to 0.25 percent, having previously held back on the decision due to fears over the strength of the jobs market. Any remaining worries about the jobs market have been pushed aside this morning though with data from the Office for National Statistics showing employment continuing to rise. The number of payrolled employees now stands at 29.5 million people, up 409,000 on pre-pandemic levels. Unemployment meanwhile has continued to fall with redundancies also reaching record lows.

Expectation now turns to the Bank of England’s next move with predictions December’s interest rate hike could be the first of more.

Shane O’Neill, Head of Interest Rate Trading for Validus Risk Management, said: “This data point is further evidence that any nerves surrounding post-furlough employment were unfounded as the labour market continues to tighten.

“These figures represent another box ticked on the path to more rate hikes, the first of which is expected as early as February.”

Thomas Pugh, economist at finance consultant RSM UK, predicted the chances were raised for an increase at the next Monetary Policy Committee (MPC) meeting on the 3rd February, adding “the MPC is likely to conclude that the labour market is strong enough to absorb higher interest rates.”

The Bank of England has been motivated so far by rising inflation which was shown to have reached 5.1 percent in November, over twice the Bank’s two percent target.

The Bank has previously predicted a peak of six percent in the first half of this year, though some economists have predicted it may go as high as seven percent.

Despite the healthy readings on the UK job market this morning, the impact of inflation is clearly showing.

While the ONS data showed wage growth of 4.2 percent, adjusted for inflation this in fact represents a 0.9 percent fall in November.

Separate analysis from think tank the Resolution Foundation also points to real wages actually falling as far back as June last year.

The Bank of England will get a further indication of inflation ahead of its next decision when new consumer price index data is released tomorrow.

While current indicators point towards a potential rate hike the Bank is also thought to be remaining mindful of what the long term picture might look like.

Dan Boardman-Weston, Chief Investment Officer at BRI Wealth Management, said the Bank would need to exercise “caution” due to predictions inflation may start to fall from May onwards.

He said: “The last thing the bank will want to do is either raise rates too far or too soon as this will be taking money out of consumers’ pockets just at the time when tax increases and higher bills are taking effect and this could put unwarranted pressure on the buoyant economic recovery.”

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Following December’s rate increase a number of banks moved to increase interest rates on their mortgage products meaning those on standard variable tariffs have been seeing their monthly costs increase.

2022 is expected to see a major squeeze on household budgets with two particular factors, an increase in National Insurance and a rise in Ofgem’s energy price cap, both hitting in April.

The US meanwhile is weighing up similar inflation issues with central bank the Federal Reserve now thought to be eyeing up as many as four rate hikes this year.

In the Eurozone inflation has also climbed beyond target with flash estimates last week putting it at five percent.

The European Central Bank however has so far steered clear of any suggestion of an increase in rates before 2023 citing fears over harming recovery.

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