By Pradeep Saran
Sep 17, 2023
LONDON (Reuters) – The Bank of England is poised to increase interest rates once again this week, potentially marking the culmination of a significant tightening cycle, given concerns arising from a cooling economy.
Nearly all of the 65 economists surveyed by Reuters in recent days anticipate that the BoE will raise the Bank Rate to 5.5% on Thursday, up from its current 5.25%. This would represent the highest level since 2007.
In contrast, financial markets appear less certain than economists, with rate futures on Friday indicating a 25% chance of a rate pause. However, both economists and market analysts are converging on the view that the series of interest rate hikes initiated in December 2021 may be reaching its conclusion.
If the Bank Rate does indeed peak at 5.5% – starting from a mere 0.1% – it would rank as the fourth-largest tightening cycle in Britain in the last century, trailing behind the sharp rate increases of the late 1980s and the early- and late-1970s, all of which were accompanied by recessions. The current concern is that the 14 rate hikes made by the Monetary Policy Committee (MPC) have not yet fully impacted the real economy.
Recent data has reinforced Governor Andrew Bailey’s earlier statement this month that the BoE is nearing the end of its tightening cycle. Economic output in July experienced a steeper decline than anticipated, partly due to factors like strikes. Moreover, the unemployment rate for the third quarter has already exceeded the BoE’s projections.
The European Central Bank (ECB) also cited a bleak economic outlook when it raised rates last week, signaling that it may be the final move in the current cycle.
However, the BoE faces a more intricate situation due to persistently high inflation in Britain, outpacing other major advanced economies. Strong wage growth data in the UK continues to point toward inflationary risks.
“While we anticipate most of the committee will favor a 25 basis-point hike, the uncertain nature of the turning point in the cycle means we expect dissenters on both sides,” remarked Jack Meaning, Barclays’ chief UK economist.
The debate could still be swayed by data released before Thursday’s announcement. Inflation figures for August, scheduled for Wednesday, are expected to rise due to increasing petrol prices. Investors remain cautious about the BoE’s tendency under Bailey to react strongly to above-forecast inflation figures, which some economists argue has undermined the bank’s ability to convey a consistent message and control market rates.
As always, the MPC’s language concerning the path forward and shifts in opinion could have significant repercussions in the financial markets. Benjamin Nabarro, Citi’s chief UK economist, suggested that a recent speech by the MPC’s most hawkish member, Catherine Mann, warning against an interest rate pause, might offer an early indication of the committee’s internal discussion. “Mann’s explicit opposition to a pause, along with her criticism of the majority MPC’s judgments, suggests an ongoing internal debate that may incline towards a pause,” Nabarro noted.
Writen By: Reuters