The Bank of England is poised to intensify the strain on households and businesses’ finances by hiking interest rates for the 12th time in a row this Thursday in a bid to bring down inflation, City analysts are betting.
Threadneedle Street’s nine-member Monetary Policy Committee (MPC), the group tasked with setting official borrowing costs in the UK, is anticipated to kick rates 25 basis points higher to 4.5 per cent, their highest level since October 2008.
Bank Governor Andrew Bailey and the rest of the MPC are likely to be lured into the decision by inflation remaining stubbornly high and the economy consistently defying the Bank’s downbeat projections.
Fresh figures out on Friday are expected to show gross domestic product – a measure of all goods and services made in the UK – grew 0.1 per cent in the first three months of this year, above the Bank’s forecasts, putting the country on track to dodge a recession in the first half of this year.
Core inflation, which strips out volatile food and energy price movements, held steady at 6.2 per cent, signifying the Bank could have to tighten policy more to unpick tough price pressures from the UK economy.
“Stronger data supports the hiking cause. Most notable releases include the upside surprise to March core inflation, a strong pick-up in underlying wage momentum, generally ongoing strength in labour market activity, a rise in consumer confidence, and a more resilient looking housing market,” analysts at Japanese bank Nomura said.
“The MPC can justifiably argue that the criteria for tightening monetary policy further that it set out in the March policy statement have been met,” consultancy Oxford Economics said.
UK inflation has been in the double digits since last summer…
Markets reckon Bailey and co will stop raising rates at around the five per cent mark, but Sanjay Raja, a senior economist at Deutsche Bank, warned the Bank may have to go further if incoming data stays hot.
“Should data [continue] to outperform Bank expectations, there is a risk that Bank Rate… [could peak] closer to 5.25 per cent,” he said.
MPC members have already embarked on their most aggressive rate hike cycle since the 1980s, backing 415 basis points of rises since December 2021.
The Bank is set to raise GDP projections this year and next and remove “much, if not all, of the recession that it had been expecting previously,” Nomura said.
Resilient consumer spending and Chancellor Jeremy Hunt stepping up government expenditure at the March budget has shielded output from the dire recession predictions of the turn of the year.
However, the Bank’s economists could forecast inflation is on track to slip below its two per cent target in the coming years, raising the chances of this Thursday’s hike being the monetary authority’s last.
There is a risk the Bank deals unnecessary damage to the economy by lifting rates too high, which could push inflation below its goal.
Monetary policy – setting interest rates – operates with a lag, so the full effects of the Bank’s 11 straight increases have yet to sweep through the UK economy.
… forcing the BoE into aggressive interest rate rises
“The higher interest rates go the more conscious the Bank will be that a big drag on activity and price pressures is in the pipeline,” Paul Dales, chief UK economist at consultancy Capital Economics, said, adding he thinks this Thursday’s hike will be the Bank’s last.
There is also an emerging consensus amongst analysts and economists that the Bank will start cutting rates around the middle of next year due to inflation tumbling and the economy stuttering.
US Federal Reserve chair Jerome Powell last week opened the door to the central bank pausing its tightening cycle after backing its 10th straight rise to a range of five per cent and 5.25 per cent.
The MPC is tipped to be divided over their next move. A 7-2 split in favour of a 25 point rise is being seen as the most likely outcome, with external rate setters Swati Dhingra and Silvana Tenreyro either backing keeping rates unchanged or a cut.
Bailey is expected to back a 25 point increase, as is the Bank’s chief economist Huw Pill, who faced a backlash recently after urging Brits to accept they’re worse off as a result of inflation.
The MPC’s policy statement, that will justify its next rate move, will provide clues on the path of borrowing costs going forward.
“To be sure, with the MPC fully in a data dependent world, the Bank will be held captive to incoming data, which will ultimately guide policy over the coming months and quarters,” Raja added.