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Interest rates to double next month, City warns as pay falls behind inflation

·3 min read
Interest rates to double next month, City warns as pay falls behind inflation

Pressure on the Bank of England to move quickly to raise borrowing costs increased today when inflation came in at a 30-year high.

That followed yesterday’s official jobs figures that showed that pay rises have fallen behind inflation for the first time since last summer.

While the jobs market is healthy, at 4.2% a year pay rises are being eaten up by higher costs.

Today, December inflation figures were put at 5.4% up from 5.1% in November. Inflation was at 0.6% just two years ago.

City economists now expect it could go as high as 7% once energy price hikes kick in. It was last near that level back in March 1992 when it was 7.1%.

That is a headache for the Bank of England, the Chancellor and millions of hard-pressed families.

The spectre of rising prices could lead to a cost of living squeeze even worse than experts have so far predicted.

The Bank put interest rates up from 0.1% to 0.25% in December and now seems almost certain to double them in February. The City expects up to two more rate rises after that this year alone.

That is already sending the cost of new mortgages higher.

The City has pencilled in a rise from 0.25% to 0.5%.

Capital Economics said: “The labour market appears to have remained tight both after the end of the furlough scheme and the start of the Omicron wave, which supports our view that interest rates will be raised from 0.25% to 0.50% on 3rd February.”

Simon French at Panmure Gordon said: “With UK inflation likely to peak around 7% in Q2, and global energy prices remaining high, the Bank of England is likely to retrace the path back to pre-pandemic interest rates of 0.75%. What happens next though is far less clear with a squeeze on real incomes.”

Alpesh Paleja, CBI Lead Economist, today said: “We’ve not seen the end of rising inflation yet. We expect it to peak in the months ahead, not least if, as expected, the energy price cap is raised.

“With prices on the rise and real wages already falling, it’s likely households will face a cost-of-living crunch for much of this year.”

Chancellor of the Exchequer, Rishi Sunak said: “I understand the pressures people are facing with the cost of living, and we will continue to listen to people’s concerns as we have done throughout the pandemic.”

In America, some economists now expect the Federal Reserve to put rates up four or more times this year in what senior policymakers have dubbed “lift-off”.

ONS jobs figures show that in December last year there were 29.5 million UK people in work, up 184,000 on November.

That is up 409,000 on the pre-pandemic level of February 2020. The UK employment rates increased by 0.2 percentage points. Unemployment is down a little at 4.1%.

TUC General Secretary Frances O’Grady said: “While it’s good to see employment continuing to rise, on pay it’s the same story of a squeeze on workers.

“Working people deserve a decent standard of living and a wage they can raise a family on. But instead, following the worse pay squeeze for two centuries, real pay is falling, and they now face a cost-of-living crisis.