Bank of England set for biggest rate hike in 27 years as inflation rises

LONDON, FEBRUARY 03: Bank of England Governor Andrew Bailey leaves after a press conference at the Bank of England on February 3, 2022 in London, England. The bank is expected to hike interest rates for the fifth consecutive meeting on Thursday but faces a difficult balancing act between supporting growth and curbing inflation.

Dan Kitwood | Getty Images News | Getty Images

London — The bank of england Interest rates are expected to rise roughly 50 basis points on Thursday, its biggest single increase since 1995.

Such a move would bring the cost of borrowing to 1.75% as the central bank grapples with rising inflation and would be the first half-year increase since independence from the British government in 1997.

UK inflation hits 40-year high of 9.4% in June As food and energy prices continued to rise, the country’s historic subsistence crisis deepened.

Bank of England Governor Andrew Bailey suggested A strange speech on July 19 That the Monetary Policy Committee may consider an increase of 50 basis points, vowing that there would be “no ifs or buts” in the bank’s commitment to bring inflation back to its 2% target.

a Reuters poll taken in the past week Indicated that over 70% of market participants are now projected to increase by half a point.

James Smith, developed market economist engsaid that although economic data has not moved the needle significantly since June’s rise of 25 basis points, the MPC’s prior commitment to act “coercively” to bring inflation down, and at this level in the market The price is more or less 50 basis points. This means that policymakers are likely to err on the aggressive side.

“Still, the window for further rate hikes looks like it is closing. Markets have already lowered expectations for a ‘peak’ bank rate from 3.5% to 2.9%, although that means That’s two more 50bp rate hikes by December, plus a little more after that,” Smith said.

“It still seems like a stretch. We are penciling in a peak for the bank rate at 2% (currently 1.25%), which means just another 25bp rate in September before policymakers tighten it. growth.”

He acknowledged that, in practice, this may be an underestimate, and based on the signal sent by the bank on Thursday, ING would not rule out an additional 25bps or more 50ps price hike.

Smith said the key points to watch in Thursday’s report will be whether the bank continues to use the term “coercive,” and its forecasts, which plug market expectations into the bank’s model and expected policy trajectory.

Should forecasts indicate, as in previous iterations, unemployment and inflation are well below targets in two to three years’ time, the market may be sending out a more clear message.

“Everyone takes that as a sign saying ‘Okay, well, if we follow through with the market’s expectation, inflation is going to be below target,’ which is very indirect of what he says. The way is ‘we don’t need to grow as aggressively as the market expects,'” Smith told CNBC on Tuesday.

“I think it will be repeated, I would hope, and it should be taken as a sign that perhaps we are nearing the end of the tightening cycle.”

development concerns

A more aggressive outlook at Thursday’s meeting will bring the bank’s monetary tightening trajectory closer to the trend set. US Federal Reserve And this European Central BankWhich one? Applicable 75 And 50 basis points increase over the last monthrespectively.

But while it may bolster the bank’s inflation-fighting credibility, the faster pace of hardening will exacerbate the risks to an already slowing economy.

Berenberg senior economist Kallum Pickering said in a note on Monday that Governor Bailey would likely have a majority of the nine-member MPC if he favors a 50 basis point hike on Thursday, and projected that inflation will likely still rise. The bank will increase another 50bp in September.

“Thereafter, the outlook is uncertain. Inflation will likely peak in October when the domestic energy price cap rises again. Amid mounting evidence that tighter monetary conditions are weighing on demand and underlying inflation, we expect the BoE to Will increase further to 25bp in November. But stop in December,” Pickering said.

Bernberg expects the bank rate to reach 2.5% in November, up from 1.25% currently, though Pickering said the risks to this call are upside sloping. He suggested that the BoE should be able to reverse some of the tightening during 2023 as inflation begins to slide, and possibly cut the bank rate by 50 basis points next year, with a further reduction of 50 basis points in 2024.

Energy Price Cap Increase

UK energy regulator Offgame raised energy price limits by 54% from April to accommodate rising global costs, but with annual household energy bills expected to rise more in October Predicted To exceed £3,600 ($4,396).

barclays The bank has historically been cautious on rates, placing great faith in the MPC’s “early and gradual” strategy. However, UK chief economist Fabrice Montagne told CNBC in an email last week that there is now a case for policymakers to act “coercively” as energy prices continue to rise.

“In particular, the rise in energy prices is feeding into our forecast of the offgame price range and will force the BoE to revise its inflation forecast again. Higher inflation is one such scenario for an even longer period of time. Which scares central banks because of the high risk of persistence and spillover,” he said.

The British banking giant now expects a “status quo” rise of 50 bps on Tuesday, followed by another 25 bps in September, and then 2%.

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