Households face FOUR interest rate hikes this year as 'Trumpflation' batters Britain
Households have been warned they face as many as four interest rate rises this year as ‘Trumpflation’ batters the British economy.With Sir Keir Starmer hosting an emergency Cobra meeting on the economic fallout of the Iran war, investors bet a rate hike could next month could be followed by as many as three more by Christmas.That would take UK rates back up to 4.75 per cent and hammer households with higher mortgage costs while also pushing up the cost of business loans.Investors later tempered their bets after Donald Trump announced a five-day halt to attacks on Iran following 'very good conversations' with Tehran.But markets still put the chances of a rate hike in April at 60 per cent with a more than 70 per chance they hit 4.5 per cent by the end of the year. Before the war in the Middle East erupted, it was hoped rates could fall to 3 per cent this year.But with oil and gas prices soaring as energy facilities in the region come under attack and the Strait of Hormuz remains all-but closed, Britain faces a brutal inflation shock.Crude jumped back towards $115 a barrel on Monday morning before falling as low as $96 following Trump's ceasefire announcement. Bank of England governor Andrew Bailey will discuss the economic fallout of the war with Keir Starmer and Rachel ReevesAnalysts at Goldman Sachs slashed their growth forecasts for Britain and Europe with UK expansion lowered to 0.6 per cent from 1.5 per cent before the war.The bank also expects unemployment to hit 5.6 per cent – the highest level since 2015.The crisis has wreaked havoc on financial markets this month with stocks tumbling before recovering today. At the same time, UK government borrowing costs have spiked violently higher, with the ten-year gilt yield rising above 5.1 per cent for the first time since 2008 having been around 4.2 per cent before the conflict.That is the biggest increase in gilt yields since the Liz Truss mini-Budget with the UK paying more to borrow than any other country in the G7.Jane Foley, senior currency strategist at Rabobank, said: ‘Just three or four weeks ago, the market had been confident of a cut in Bank of England rates, followed by another later in the year. These hopes evaporated this month as oil and gas prices lurched higher.’
Chris Beauchamp, chief market analyst at IG, said: ‘UK rate expectations have been on a remarkable journey in barely a month.‘The bad news for consumers is compounded by dire news for the government, as the ten year yield tops 5 per cent.‘A fiscal squeeze of dire proportions has exploded in a matter of weeks, but with more escalation expected in the Middle East, this may be just the beginning of the crisis.’The surge in borrowing costs and darkening economic outlook will be discussed this afternoon as the Prime Minister is joined by this Chancellor Rache l Reeves and Bank of England governor Andrew Bailey.Daniela Hathorn, senior market analyst at Capital.com, said the talks ‘highlight just how quickly the Middle East conflict has moved from a geopolitical issue to a domestic economic risk for the UK’.She added: ‘The decision to convene a Cobra meeting with the Prime Minister, Chancellor and Bank of England Governor underscores the seriousness of the situation.‘This is not just about monitoring markets, it’s about managing potential spillovers into energy security, inflation and financial stability. The UK is particularly exposed on all three fronts.‘Its reliance on imported natural gas makes it vulnerable to global energy shocks, while inflation is already elevated and public finances remain stretched. That combination explains why UK gilts have underperformed peers as markets are demanding a higher risk premium for holding UK debt in an increasingly uncertain environment.’Britain is the only country in the G7 with a ten-year bond yield of over 5 per cent – making a mockery of Sir Keir Starmer’s claims to have made the UK ‘better prepared for a more volatile world’.Higher borrowing costs are a major headache for Ms Reeves as they push up the cost of servicing Britain’s mammoth £2.9trillion debt pile.But shadow chancellor Sir Mel Stride last week accused Labour of ‘spending like drunken sailors’ – particularly on welfare – leaving the UK vulnerable to the shock.Russ Mould, investment director at AJ Bell, said: ‘The outlook for UK interest rates has radically changed.‘Three weeks ago, the market expected two rate cuts in the UK this year. We’re now looking at a situation where rates could be hiked four times by the end of 2026.‘That has significant consequences for consumer and business spending, for the UK economy, and for public finances as the government’s cost of servicing debt would go up and tighten fiscal headroom.’He added: ‘The risk dial has been turned up again on the Middle East conflict, causing widespread turbulence on financial markets‘Donald Trump imposing a tight deadline changed the narrative for markets. Up until yesterday, investors were unsettled by activities but hoped the US president would eventually back down.‘Trump telling Iran it had 48 hours to open Hormuz or the US would destroy its power plants is a complete U-turn from the president’s remarks last Friday that hinted at winding down military operations in the Middle East.‘So far during the current crisis investors have focused on the potential for a short, sharp inflationary shock. That’s an uncomfortable situation, but nothing out of the ordinary. Now the focus shifts to a more serious scenario where any destruction of vital infrastructure in the Middle East could cause major disruption to energy and food supplies on a wider scale, and a notable hit to economic growth with longer-lasting consequences.AJ BellAJ BellEasy investing and ready-made portfoliosHargreaves LansdownHargreaves LansdownFree fund dealing and investment ideasinteractive investorinteractive investorFlat-fee investing from £4.99 per monthFreetradeFreetradeInvesting Isa now free on basic planTrading 212Trading 212Free share dealing and no account feeAffiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.Compare the best investing account for you
