Dan Kitwood | Getty Images News | Getty Images
LONDON – The Bank of England on Thursday is widely expected to raise interest rates by 50 basis points, the largest increase since 1995.
Such a move would raise borrowing costs to 1.75% as the central bank battles soaring inflation and would be the first half-point increase since it became independent from the British government in 1997.
UK inflation hit a 40-year high of 9.4% in June as food and energy prices continued to rise, exacerbating the country’s historic cost of living crisis.
Bank of England Governor Andrew Bailey suggested in a hawkish speech on July 19 that the MPC could consider a 50 basis point hike, pledging that there would be “no condition or reservations” in the Bank’s commitment to return inflation to its 2% target.
A Reuters poll last week showed that more than 70% of market participants now expect a half-point rise.
James Smith, advanced markets economist at ING, said that although economic data since the June 25 basis point increase has not moved the needle significantly, the MPC’s previous commitment to act “aggressively” to bring down inflation, the market is more or less pricing in 50 A basis point at this point, means that policymakers are likely to err on the aggressive side.
“However, the window for further rate hikes appears to be closing. Markets have already lowered expectations for a ‘peak’ bank rate from 3.5% to 2.9%, although this still means a 50bp rate hike. basis by December, plus more, Smith said.
“That still looks like a stretch. We’re starting to hit a peak in the bank rate at 2% (currently 1.25%), which means a 25 basis point rate hike in September before policy makers stop tightening.”
He acknowledged that, in practice, this could be an underestimate, and depending on the signal the bank sends on Thursday, ING would not rule out a 25-point-per-second increase or at most 50-point increases beyond that.
Smith said the main points to watch for in Thursday’s report will be whether the bank will continue to use the word “vigorously,” and its outlook, which links market expectations to the bank’s models and the expected policy path.
If, as in previous iterations, forecasts point to unemployment and inflation accelerating below target in two to three years, markets could infer a more pessimistic message.
“Everyone takes that as a sign that they’re saying ‘OK, OK, if we want to track what the markets are expecting, inflation is going to be below target,’ which is their indirect way of saying ‘We don’t need to go up as hard as the markets are expecting,'” Smith told CNBC. Tuesday.
“I think this will repeat, I expect, and that should be taken as a bit of an indication perhaps that we are nearing the end of the tightening cycle.”
A more aggressive approach at Thursday’s meeting would bring the bank’s monetary tightening path closer to the direction set by the US Federal Reserve and the European Central Bank, which implemented hikes of 75 and 50 basis points last month, respectively.
But while it may enhance the bank’s anti-inflation credibility, a faster pace of tightening will exacerbate downside risks to an already sluggish economy.
Berenberg Chief Economist Calum Pickering said in a note on Monday that Governor Bailey would likely hold a majority of the nine-member Monetary Policy Committee if he supported a 50 basis point rise on Thursday, and predicted that with inflation continuing to rise, the bank would raise the another side. 50 basis points in September.
“After that, the outlook is uncertain. Inflation is likely to peak in October when the household energy price ceiling will rise again. Amid mounting evidence that monetary tightening is weighing on demand and core inflation, we expect the BoE to rise by 25 points. Other bases in November but discontinued in December.
Berenberg expects the bank rate to reach 2.5% in November, up from 1.25% currently, although Pickering said the risks of this call are skewed to the upside. He noted that the BoE should be able to reverse some of the tightening through 2023 as inflation kicks in, and is likely to cut the bank rate by 50 basis points next year with an additional 50 basis points cut in 2024.
Energy price ceiling rises
British energy regulator Ofgem raised the ceiling on energy prices by 54% from April to absorb higher global costs, but are expected to rise further in October, with annual household energy bills expected to exceed £3,600 ($4,396).
Historically, Barclays has been cautious about bank interest rates, placing great faith in the MPC’s “early and progressive” strategy. However, UK chief economist Fabrice Montaigne told CNBC in an email last week that there is now a case for policymakers to act “aggressively” as energy prices continue to rise.
“In particular, higher energy prices are fueling our expectations of the Ofgem price ceiling and will force the BoE to revise inflation expectations again. Higher inflation for a longer period is the type of scenario that frightens central banks due to higher persistence risks and spillovers.”
The British banking giant now expects a 50 basis point rise on Tuesday followed by 25 basis points in September and then the “status quo” of 2%.