The Bank of England is expected to raise interest rates by a quarter point to 4.75 per cent on Thursday, with increasing calls for tougher action to fight persistent high inflation.
Headline inflation stuck at 8.7 per cent in May, according to worse than expected data on Wednesday, with core inflation — which excludes volatile food and energy prices — rising to 7.1 per cent, the highest level since 1992.
Some economists said the inflation figures had been so bad that the BoE might surprise with a 0.5 percentage point rise at its midday announcement or signal a large move to come at the next Monetary Policy Committee meeting in August.
Allan Monks, UK economist at JPMorgan, said the two inflation figures since the BoE’s last meeting left him “feel[ing] strongly that the MPC should act forcefully by hiking 0.5 percentage points this week”.
But he said the MPC would probably stick with a smaller increase, “purely on the basis that the BoE has provided no signal of a step up, no forward guidance on the issue”.
With financial markets now expecting interest rates to hit 6 per cent by the end of the year, driving up the cost of mortgage payments, ministers are braced for a backlash among core Conservative voters ahead of next year’s election.
Rishi Sunak, prime minister, will say on Thursday that he feels “a deep moral responsibility” to tackle inflation, arguing that any delay in dealing with the problem will make matters worse.
“That’s why our number one priority is to halve inflation this year and get back to the target of 2 per cent,” he will say. “And I’m completely confident that if we hold our nerve, we can do so.”
Almost half of all mortgage holders said they had found it difficult to pay bills and service their debts in the past few months, according to a survey from debt relief charity, StepChange, carried out before the latest concerns over mortgage rates.
In response to the gathering mortgage misery for households coming to the end of fixed-rate deals, Labour, on Wednesday night, called on the government to require lenders to help struggling borrowers.
This support could come for instance through lengthening the term of a mortgage or allowing them to switch to interest-only payments for a temporary period.
The Conservatives argue that banks are already required to engage with customers struggling to pay their home loans under a regime policed by the Financial Conduct Authority.
After Wednesday’s figures, the prime minister’s January pledge to halve inflation has become harder to hit. Successfully lowering inflation to 5.8 per cent in the fourth quarter would require bringing down the monthly rate from 0.7 per cent in May to 0.3 per cent for the next six months.
Virgin Money, TSB and NatWest were among the mortgage lenders to announce higher interest rates on fixed-rate deals on Wednesday.
Average rates on two-year fixes hit 6.15 per cent just ahead of the inflation announcement, up from 5.98 per cent on Friday, according to finance site Moneyfacts.
Meanwhile Jeremy Hunt, chancellor, met MoneySavingExpert founder Martin Lewis to discuss rising mortgage rates. Lewis said this week that the “ticking time-bomb” he had warned about had now “exploded”.
The combination of stubbornly high inflation, rising interest rates and the increasing cost of servicing government debt have undermined Hunt’s hopes of going into a 2024 election on the back of significant tax cuts.
Meanwhile, the theft of meat, alcohol and confectionery from shops last year reached a decade-high of 1.1mn incidents, according to new data on Thursday from the Association of Convenience Stores.