HOUSEHOLDS are facing a punishing cost of living squeeze with up to FOUR interest rate hikes feared by next summer.
Millions of Britons could see mortgage repayments jump as the war in Iran drives up fuel costs and threatens another surge in winter energy bills.
Rob Wood, chief UK economist at Pantheon Macroeconomics, warned that a “perfect storm” of war-driven oil and gas price rises and dwindling energy stocks would hit household finances.
He said: “The Bank of England cannot ignore soaring energy prices for much longer.”
Panicked financial traders are now betting the Bank of England will be forced to raise interest rates four times over the next year to get a grip on spiralling inflation.
This would push rates from 3.75% up to 4.75% by next July, bringing fresh misery to homeowners who are already being squeezed.
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Homeowners are already taking the brunt of the fallout as major high-street lenders including HSBC, Halifax, Lloyds, Nationwide and Santander push up their rates.
The average two-year fixed mortgage has leaped to a five-month high of 5.67%, while five-year deals have hit 5.72%.
Money markets warn there is even a one-in-four chance the Bank of England could raise borrowing costs as early as next week, with further hikes expected before Christmas.
The economic turmoil is being driven by dramatic events overseas after fighting in Iran and Houthi rebels seizing a key Red Sea shipping port threw global energy markets into chaos.
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Crude oil has exploded past $108 a barrel and UK wholesale gas prices have soared to £2 per therm, which is their highest level since December 2022.
When wholesale energy costs soar, inflation inevitably follows, forcing central banks to raise interest rates to slow down spending.
Motorists are already feeling the squeeze as fuel costs climb.
RAC figures show the average UK petrol price has jumped to 168.46p a litre, while diesel has risen to 190.08p on Friday.
Both have increased by 7p since the start of the month, adding £3.85 to the cost of filling a typical family car.
The RAC has warned that diesel is on course to hit a new war-driven record within days.
Households also face the prospect of another sharp rise in energy bills in January as UK gas prices continue to climb.
Ofgem has already confirmed that the energy price cap will rise by 4% in October, taking the typical annual bill to £1,723 after a steep 13 per cent increase in July.
But leading economist Simon French has warned that January could deliver an even bigger shock.
He predicts an 18% surge, adding a further £310 to annual bills in what would be the largest quarterly increase since the energy crisis struck in 2022.
Adding to the pressure, European gas storage levels are running alarmingly low at just 67% full, compared with almost 80% at the same point last year.
The warnings of more financial pain for households come despite official figures showing that the UK economy grew by 0.4% in July.
However, James Smith, an economist at Dutch bank ING, warned that the economy may not be performing as well as the figures suggest.
He said: “We still think the GDP figures are overstating the true pace of economic growth.”
Smith said a boom in the technology sector was masking weaker growth elsewhere.
High inflation had also skewed the data, making growth in the first half of the year appear better than it was.
Matt Swannell, chief economic adviser to the Item Club, said growth in the services sector was limited to a few business-focused industries, such as IT and administration.
Services used by consumers, however, declined.
He added: “Households’ spending power is being squeezed by rising energy bills, while tightening financial conditions weigh heavily on consumers’ and businesses’ spending decisions.”
Andrew Wishart, senior UK economist at Berenberg, said the surprise economic growth suggested interest rates were not as restrictive as previously thought.
He said: “Evidence that the economy could cope with a solitary quarter point interest rate hike adds to the risk that the Bank of England will deliver one in November or December.”
Chancellor John Healey said: “Britain’s economy is demonstrating a welcome resilience, despite serious global uncertainty.”
“We are shifting power to local communities to generate growth in more places and backing business to succeed with more investment, innovation and jobs,” he said
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However, Andrew Griffith, the Conservative shadow chancellor, said: “Nobody in this Labour Government should be high-fiving themselves.
“Our construction and production sectors are shrinking, unemployment is up under Labour, and we’ve got the highest government borrowing rates in almost 30 years.”