The Bank of England is expected to increase interest rates next week, the fifth time since December. This was its steepest rate hike in 25 years. It will likely continue this trend in the months ahead as inflation reaches double digits.
While Britain is forecast to have the weakest economy in 2023 among the world’s rich countries, most economists and investors predict a quarter-point rate increase by the BoE on Thursday.
This would bring the Bank Rate up to 1.25%. It is at its highest level since January 2009 when Britain was hit hard by the global financial crisis.
Although historically low, British borrowing costs are expected to rise over the next few years. They have risen recently and jumped again this week when the European Central Bank announced rate hikes at its next meeting. This includes a possible half-point increase in September.
Investors have placed their bets on the BoE’s Monetary Policy Committee increasing the Bank Rate to 2% by September, and then reaching 3% by March 2019. Economists are also increasing their forecasts.
Deutsche Bank’s Sanjay Raja stated that rates are now expected to peak at 2.5%. This is up from a previous call at 1.75%. Next week, there will be a 0.25% rise.
“We don’t expect a unanimous decision, however. In a note to clients, he stated that the risks are tilted towards a split MPC with at least three members looking for a larger 50-basis-point move. “There is also the possibility of a more chaotic vote with one or two members seeking no change in the Bank Rate.
Before the U.S. Federal Reserve, the BoE was the first major central bank to reverse its pandemic stimulus in Dec.
However, British inflation reached a 4-year high in April at 9%. This is almost five times the BoE target of 2%.
According to the BoE, inflation will rise to 10% by 2022 when regulated energy tariffs will go up by 40%. Consumers have already slowed down their spending, while signs are pointing to a slowdown in the housing market.
Andrew Bailey, Governor of the BoE, stated in April that the BoE was balancing the need to tackle the price rise and the risk of a recession. With wage agreements starting to rise, the BoE has made it clear that its priority is to fight inflation.
The BoE released a survey on Friday showing that the public expects inflation to rise in the coming year at 4.6%. This is the highest record since 1999.
Rishi Sunak, the finance minister, has increased the amount of money given to households since the central bank’s May meeting. This helps to reduce the risk of a recession, and possibly increase inflation pressures.
Sunak will receive billions of pounds in additional support later this year, as Prime Minister Boris Johnson fights to save his political career after 41% of Conservative Party lawmakers voted against him Monday.
A post-Brexit trade conflict between Britain and the European Union could lead to an increase in tensions, which could fuel inflation.
Capital Economics economist Paul Dales said that investors underestimate the likelihood of a half-point rate hike by BoE next week. This is especially true if there are strong economic growth and labour market data due Monday and Tuesday.
He stated that “Either direction, we believe it will be very close with either the MPC voting 5-4 to increase the 50 basis points or 5-4 to increase the 25 basis points,” in a note sent to clients.
Friday’s markets were pricing in a 30% chance that the BoE would make a half-point change on June 16th.
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