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Interest rates could rise as high at 5 per cent early next year according to economists who, following the Bank of England’s decision to increase the base rate to 2.25 per cent, believe the era of low rates is over.

The Bank’s Monetary Policy Committee voted 5-4 to raise rates by 0.5 percentage points on Thursday, with three members voting for a 0.75 point rise and one member a rise of just 0.25 points.

Despite the increase – the seventh since December last year – not being as high as many economists expected, the leap from 1.75% to 2.25% did represent the largest rise in 33 years, leaving interest rates at a 14-year peak.

However, economists were united in the view that with inflation at 9.9 per cent – five times the Bank of England target – more rate rises were inevitable.

Dr Tony Syme, finance and economy expert from the University of Salford, said: “One thing is clear. The era of cheap interest rates and unconventional monetary policy is over. We can expect interest rates to be in the 4 to 5 per cent range even in good economic times.”

Robert Salter, a partner at tax and advisory firm Blick Rothenberg, added: “With the level of Government borrowing set to rise due to the expected tax cuts and the cost of the energy price freeze, I certainly imagine interest rates going to 4 or 5 per cent personally, just because if you look at things on historical basis that’s not particularly high.

“But there’s a case for them going even higher. What if, for example, the US Federal Reserve raises rates to 6 per cent? Will we follow suit? We almost always have in the past.”

A rate rise to such levels would strike fear into many households on variable rate or tracker mortgages, and could make it unaffordable for first-time buyers to get on the housing ladder.

However, some analysts are not convinced rates will get so high.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: “The energy price freeze has made the Bank of England’s task a little bit easier, as inflation is now not expected to peak at the really scary level of over 20%, but the pressure is still on.

“Given the shock and awe tactics of other central banks, who appear to be bringing forward planned rate rises for 2023 into the next few months, the Bank of England is also expected to keep pulling tight on the monetary policy rope to try and tug inflation down with forecasts that interest rates may reach anywhere between 3.5% and 4.75%. It’s clear the path ahead is fraught with uncertainty.’’

The widely respected forecasting group EY ITEM Club is even less fearful of rate hitting 5 per cent. Martin Beck, chief economic adviser to the group, believes the energy support packages to both households and businesses will help the Bank of England keep a lid on interest rates, but does not believe it will be the final rise this year.

“As things stand the EY ITEM Club thinks the MPC will raise rates again in its next meetings in November and December, although the divisions seen in September’s vote make predicting the size of those increases tricky,” said Mr Beck.

“But as evidence of disinflationary pressures builds, the cycle of increasing rates is likely to come to an end around the turn of 2022/2023, with [the] bank rate forecast to peak at 3 to 3.25 per cent.”

Yael Selfin, chief economist at accountancy giant KPMG, agreed with Mr Beck. He said: “We don’t expect the Bank to waste any remaining meetings this year on policy inaction, with further hikes in November and December, bringing the bank rate to 3.25% by February next year.

“This will inevitably hurt homeowners who come to the end of their fixed-rate contracts, as well as businesses, most of which largely rely on floating rate loans for funding.”

Interest rates could hit 5% in 2023 as ‘era of low rates is over’, economists claim

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