The Bank of England is on track to kick interest rates up to their highest level in over 23 years in a bid to rein in inflation that is withstanding prior increases to borrowing costs, markets are betting.
City traders ratcheted up their bets on peak UK interest rates in response to numbers from the Office for National Statistics (ONS) this morning that showed inflation is still plaguing the economy.
Market participants now think Bank Governor Andrew Bailey and the rest of the monetary policy committee (MPC) – the nine-strong group who set official UK borrowing costs – will lift rates to at least six per cent.
That would be the highest level since February 2000 and mark a huge shift in monetary policy since the financial crisis. For over a decade and up until December 2021, rates were near zero per cent.
Prices rose 8.7 per cent in the year to May, matching April’s rate of price increases and topping the City’s expectations of a fall to 8.4 per cent.
Those figures signal that domestic factors are beginning to take control of UK inflation. The initial price surge was sparked by a sudden burst in global spending after Covid-19 lockdowns ended colliding with strained supply chains.
Russia’s invasion of Ukraine amplified inflation by rocking international energy markets.
MPC officials will announce their next interest rate decision at midday tomorrow. Before today’s inflation numbers, they were tipped to lift them 25 basis points to 4.75 per cent, marking the 13th straight rate increase.
However, mounting evidence illustrating that underlying inflationary pressures are withstanding prior rate increases is raising the chance of a bigger 50 basis point increase by Bailey and co tomorrow.
Analysts at Japanese investment bank Nomura said today’s shock inflation data “raises [the] risk” of a steeper hike tomorrow, but said they still think a smaller lift is more likely.
“There is a strong argument for a 50-basis point hike at tomorrow’s Bank of England’s meeting. The Bank needs to take the initiative quickly. The risk for further policy failure is real and the stakes are getting increasingly high,” Charles White Thomson, chief executive at Saxo UK, said.
Markets are pricing in a two in five chance of a 50-basis point rise, up from an around 20 per cent risk before this morning’s numbers.
Economists are worried that the Bank will strain the economy too hard and engineer a recession. Others have argued growth is being choked by soaring prices.
The Bank of England is supposed to keep inflation at two per cent. It has not achieved that target since July 2021.
Britain’s inflation rate is by the far highest in the rich world. Italy, at eight per cent, has the closest rate of price increases in the G7.