Interest rates are likely to jump as markets await the Bank of England’s decision

Mortgage rates are expected to jump on Thursday in response to the biggest increase in the Bank of England’s base rate since 1989, as the central bank tries to bring down a rate of inflation expected to remain in double digits until at least next spring.

Marking the eighth rate hike in a row, the Bank of England is expected to raise the base rate by 0.75 percentage points to 3% after what is likely to be a tense meeting of the Monetary Policy Committee (MPC).

With economic figures showing that Europe and the US will be in recession next year, members of the MPC are expected to remain divided on whether to limit the rise to 0.5 percentage points, to prevent an even deeper decline than already forecast.

The nine-strong MPC will come under pressure from rate hikes by the US Federal Reserve, which on Wednesday raised its rate by 0.75 percentage points, and the ECB, which last week raised its main deposit rate by the same amount.

Last month, Bank Governor Andrew Bailey said the economic situation had worsened since the MPC signaled a 0.5% increase over the summer.

He said: “As it stands today, my best guess is that inflationary pressures will require a stronger response than we might have thought in August.”

Homebuyers with tracker or variable rate mortgages will feel the pain of the rate hike immediately, while the estimated 300,000 people who will have to remortgage this month will find that two-year and five-year fixed rates remain at levels not seen since the 2008 financial crisis.

The average two-year fixed rate has fallen to 6.47% from 6.65% in mid-October – as the effects of the disastrous Kwasi Kwarteng mini-budget – but is still three times the rate lenders were offering earlier this year. A five-year fixed-rate mortgage that could be bought for 6.51% on October 20 has fallen only marginally to 6.31%.

Investors expect the bank to continue its program of raising rates into next year, although Bailey stresses that each decision is made on its merits from one meeting to the next.

Until recently, the base rate was forecast to reach 5% before falling back in 2024.

MPC members Ben Broadbent, a deputy governor of the bank, and Catherine Mann, who joined last year from a US investment bank, have argued that financial markets are overestimating how high interest rates will go.

In response to their interventions, markets have cut the top rate to 4.75%.

Capital Economics, a consultancy, said the Fed and ECB were ready to signal a slowdown in rate hikes, but Britain’s weak financial position meant the Bank of England would have to press on.

But many analysts said they expected the bank to ease its rate hikes next year in response to a tight government budget that is reducing household purchasing power.

Analysts at Deutsche Bank have said they expect Threadneedle Street to pick a 0.75 percentage point increase with a split vote.

Experts at the firm said they expected the latest forecasts from the Bank of England, also to be revealed on Thursday, to show that “the economic outlook has deteriorated further”.

They added: “Dependent on market pricing, the UK economy is likely to enter a deeper and more prolonged recession.”

Chancellor Jeremy Hunt is understood to be considering steep tax increases to limit the government’s spending deficit when he announces his budget on November 17.

Hunt and Rishi Sunak have argued they need to stop a widening deficit in government spending to reassure financial markets that the tax cut proposals in September’s mini-budget were an aberration.

Economic conditions have worsened in most developed economies in response to the Russian invasion of Ukraine and a sharp increase in energy costs.

British factories reported a fall in order intake in October that is likely to plunge the manufacturing industry into recession before the end of the year. Retailers and service companies have come under pressure from falling consumer and business confidence.

Rachel Reeves, Labour’s shadow chancellor, said: “Britain’s unique exposure to economic shocks has been a failure to come to terms with more than a decade of weak growth, low productivity and underinvestment and rising inequality.

“Rising interest rates will mean families with already stretched budgets will be hit with higher mortgage payments.

– It will mean higher financing costs for the companies.

“For many companies that have had a tough couple of years, this will mean desperately difficult decisions about whether to continue.”