Mortgage warning: Interest rates set for horror rise to 7 per cent - new analysis

Andrew Bailey at a press conference

Andrew Bailey has been tipped to increase interest rates further

Sam Montgomery

By Sam Montgomery

Published: 06/07/2023

- 10:57

The Bank of England could hoist interest rates to stamp out sticky inflation says JP Morgan

Interest rates are tipped to rise as high as 7 per cent in a bid to shock the UK into making changes to curb runaway inflation.

While such a move might help reduce inflation, the Bank of England would raise the risk of recession and cause chaos in the mortgage market.

Allan Monks, economist at JP Morgan, said the bank’s main forecast was for the base rate, which has recently reached 5 per cent, to peak at 5.75 per cent in November.

However, Monks believes the Bank of England would not stop there should inflation be deemed to have become “entrenched” as “households keep pushing for higher wages and firms seek to protect their profit margins”.

Houses with some construction

More than two in five (42 per cent) house sellers are accepting decreases of at least five per cent on the asking price, according to Zoopla.


At the time of Sunak’s pledge to half inflation by the end of 2023, the Consumer Price Index (CPI) stood at 10.1 per cent.

By May 2023 this figure remained sticky at 8.7 per cent, which was unchanged from April.

While food inflation has come down slightly, though remaining high at 18.3 per cent, economists are concerned about stubbornly high core inflation, which has risen to 7.1 per cent, the highest annual rate increase since March 1992.

With high demand propping up the market and Bank of England base rate rises showing no signs of relenting, lenders are continuing to pull their cheapest deals and reprice their offers higher.

Bank of England construction work

The base rate is now at its highest level in 15 years.


The average two-year fixed-rate price has now rocketed to 6.4 per cent and there are no two-year fixes below 5 per cent.

When rates were last this high, on the eve of the financial crisis, around half of mortgages were set at fixed rates meaning half of homeowners would feel the pinch immediately.

Today, only 15 per cent are on variable rates meaning that the vast majority are insulated from extra cost in the short term but the 800,000 people set to remortgage their homes in 2024 will face a jump in cost.

Ying Tan, the new CEO (subject to FCA approval) of whole-of-market mortgage brokers Habito told GB News: "I urge the Bank of England to take a momentary pause in their rate hikes and allow the previous 12 months of continuous increase to take effect before deciding their next action.”

\u200bAndrew Bailey holding up a \u00a350 note

Andrew Bailey has been Governor of the Bank of England since March 2020


Sir Howard Davies, NatWest chairman and former Bank of England deputy governor, also proposed the Bank ‘wait a bit’ for the impact of its last bumper rate rise in late March to take effect.

Sir Howard told Radio 4: “In the past when we've had significant rises in interest rates – say, before the last financial crisis – the mortgage market in this country then was largely variable rate.

While the UK has avoided recession so far, the economy grew by just 0.1 per cent in the first quarter of 2023 according to the Office for National Statistics (ONS).

According to the OECD, GDP growth is expected to hover around a modest 0.3 per cent growth in 2023.


Sunak in hard hat and high visSunak under pressure for soaring mortgage costs and stagnant house buildingPA

While UK GDP in Q1 was 0.5 per cent lower than pre-pandemic level, the Eurozone GDP was 2.2 per cent higher than its pre-pandemic level.

The UK's net debt has reached £2.6trillion as of the end of May, which is estimated at 100.1 per cent of the UK's entire gross domestic product (GDP), the Office for National Statistics (ONS) has confirmed.

It is the first time the debt-to-GDP ratio has risen above 100 per cent since March 1961.

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