Bank of England to hike by 75 bps on November 3rd or may go higher

Reuters polled economists over the past week to determine whether the Bank of England will increase interest rates by 75 basis points on November the third.

Rising borrowing costs are part of a cost-of-living crisis that is hammering consumer spending. Liz Truss was replaced by Rishi Sunak to become Britain’s third prime Minister in less than two months. This has been one of the most turbulent periods of British political history.

Sunak has not yet revealed his policies, but he is likely to keep Jeremy Hunt, the finance minister. Hunt was brought in less than two weeks ago to calm the volatile bond market. He ripped up most of Truss’s fiscal plan, which played a significant role in her swift downfall.

On Oct. 31, a new budget will be released. Some of the usual contributors have declined to take part in the poll. This was taken largely prior to Sunak’s appointment.

Inflation still stood at a 40-year high of 10.1% in September. This is more than five times the BoE target of 2%. This adds to the pressure on the central banks to act. It would also increase the burden for consumers with large amounts of debt.

The poll revealed that annual price increases were forecast to reach 10.4% in the current quarter. They will then continue to decline but not to their target level until at least 2025.

Twelve of 17 respondents were asked to predict how the cost of living would change over the next six months.

According to the poll, the median prediction was that the BoE would raise the Bank Rate by 75 bps to 3.0% next week. This view was held by 18 out of 30 respondents. However, 10 predicted 100 bps, 125 bps, and 150 respectively.

The rate would then peak at 4.25%, with an additional 75 bps expected in December and 50 next quarter.

Both the European Central Bank as well as the U.S. Federal Reserve are likely to announce 75-bps increases at the next meeting.

Markets expect a 75-bps increase in Bank Rate next week. However, Deputy Governor Ben Broadbent stated last week that “whether official interest rate increases must be quite as great as those currently priced in the financial market remains to be seen.”

“When Ben Broadbent speaks, we listen closely. “We now believe our forecast is more likely to be too high rather than too low,” stated Samuel Tombs from Pantheon Macroeconomics. He currently sees rates at 4.00%.

The Bank will begin Quantitative Tightening (QT), selling some of its 838 Billion Pounds stock of British government bonds, which it has acquired over more than a decade in crisis-fighting. This includes the global financial crisis and the aftermath of the coronavirus pandemic.

The Bank’s QT plans should be delayed due to recent ructions in the gilts market. Economists disagreed on whether it should. Nine of 17 respondents said it shouldn’t, and eight said it should.

Britain is in recession. Medians indicated that the economy would contract by 0.3% this quarter and 0.4% next quarter. 0.2% in Q2 and 0.1% respectively. The forecasts were significantly revised.

Andrew Goodwin, Oxford Economics, stated that “the intensity of cost-of-living pressures and market interest rates remain above their pre-mini budget levels means that we continue to believe that the economy will shrink by H1 2023.

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