Commenting on the expected Bank of England interest rate rise, Chris Arcari, Head of Capital Markets, Hymans Robertson, said:

“Despite Bank of England Governor Andrew Bailey’s recent comments that further interest rate rises may not be required, markets fully expect the Bank of England to raise the bank rate from 5.25% p.a. to 5.5% p.a. at the September Monetary Policy Committee meeting and are split on whether interest rates are raised again, to a peak of 5.75% p.a., in this rate-hike cycle in early 2024 (i.e. are expecting one further 0.25% p.a. increase after the September meeting).*

“Given falls in energy prices between July and August in 2022, and rises between the same months this year, year-on-year headline inflation was expected to re-accelerate in August given a smaller downwards impact from energy prices. However, we do not expect this will be particularly influential on the outcome of the September meeting.

“Year-on-year core and services CPI inflation running at 6.9% and 7.4%, respectively, in July, and regular wage growth remaining at a record pace of 7.8% year-on-year in the 3 months to end-July, will be of more concern to the BoE and gives the MPC ample justification to continue raising interest rates in the face of genuine signs of domestically-driven inflation pressures.

“Despite further actual, and expected, increases in the BoE base rate, expectations of where interest rates ultimately peak in this cycle have fallen in recent months following July’s downside surprise in headline and core inflation. This has provided a little relief to the mortgage market, as fixed-term mortgages are determined by 2- and 5-year swap rates, or interest rate expectations, rather than the base rate.”

*UK instantaneous overnight index-swap forward curve, 14 September 2023