Bank of England To Hit 6.0% Says NatWest

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The Bank of England has had a "crossing the rubicon" moment and will hike interest rates by a further 100 basis points before the year is done says NatWest Markets.

Responding to the Bank's surprise 50 basis point hike, Ross Walker, Head of Global Economics at NatWest says "we tend to view June’s policy outcome as a fundamentally ‘hawkish hike’ in the sense that the strengthened language, most notably in the Governor’s statement, seems to suggest a ‘crossing the Rubicon’ moment and a shift in reaction function."

The Bank raised rates by 50bp and offered little to suggest that accelerating the cycle now would allow it to halt sooner, "it feels as if the BoE is, for the first time during this tightening cycle, occupying the same hawkish terrain as the interest rate markets," says Walker.

NatWest, one of the UK's largest mortgage lenders, says its previous forecast for the peak in Bank Rate to be at 5.0% now needs to be revised higher. Economists now look for another 50bp hike in August and a further rise to a 6.0% peak, either via two 25bp increments in September and November or perhaps a U.S. Fed-style skip in September before a final 50bp hike in November.

"All rather consensual and chasing the market, but there it is. The additional policy tightening will propel debt-servicing costs even higher, albeit with a lag. A harder landing and technical recession now seem the more likely central case," says Walker.

The rise in lending costs will lead to more than a million households (4% of all UK households) running out of savings according to research from the National Institute of Economic and Social Research (NIER).

Following the Bank's rate hike, NIESR warns higher mortgage repayments will take the total proportion of insolvent households to nearly 30% (around 7.8 million).

"The rise in interest rates to 5% will push millions of households with mortgages towards the brink of insolvency. No lender would expect a household to withstand a shock of this magnitude," says Max Mosley, an economist at NIESR.

The largest impact will be felt in Wales and the North-East where up to 6% of households are projected to be insolvent by the end of the year as a direct result of rising mortgage repayments.

Also, the analysis finds that the rising repayments in aggregate will wipe out 0.3% of UK GDP, costing all households with mortgages a total of £12bn per year.

Fixed-rate monthly mortgage repayments will rise from around £700 to £1,000 on average: this applies to nearly 2m households when needing to remortgage.

Variable-rate monthly mortgage repayments will rise from around £450 to £700: this applies to 1.5m households on variable-rate mortgages.