Bank of England plans biggest rate hike in 27 years as inflation soars
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 raise interest rates for a fifth straight 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 is expected to raise interest rates by 50 basis points on Thursday, its biggest increase since 1995.
Such a move would take borrowing costs to 1.75% as the central bank battles soaring inflation and would be the first half-point hike since being made independent of the UK government in 1997.
UK inflation hit a new 40-year high of 9.4% in June as food and energy prices continued to rise, deepening the historic cost of living crisis in the country.
Bank of England Governor Andrew Bailey suggested in a hawkish speech on July 19 that the Monetary Policy Committee might consider a 50 basis point hike, vowing there would be “no ifs and buts”. in the Bank’s commitment to bring inflation back to its 2% target.
A Reuters poll conducted last week indicated that more than 70% of market participants now expect a half-point rise.
James Smith, developed markets economist at ING, said that while economic data since June’s 25 basis point rise has not moved the needle significantly, the MPC’s earlier commitment to act ” forcefully” to lower inflation, and the market plus or minus 50 basis point pricing at this point, means policymakers are likely to err on the side of aggressiveness.
“Even so, the window for further rate hikes appears to be closing. Markets have already reduced expectations of a 3.5% Bank Rate ‘peak’ to 2.9%, though that still implies two more 50 basis point rate hikes by December, plus a bit more after that,” Smith said.
“It still looks like a stretch. We’ve plotted a peak for the Bank Rate at 2% (currently 1.25%), which would mean a single rate hike of 25 basis points in September before policymakers decide. 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 another 25bp or at most 50bp of upside beyond that.
Smith said the key things to watch in Thursday’s report would be whether the Bank continues to use the word “with force” and its forecasts, which incorporate market expectations into the Bank’s models and the political trajectory. expected.
If forecasts point, as in previous iterations, to accelerating unemployment and inflation well below target within two to three years, markets could infer a more dovish message.
“Everyone takes that as a sign that they’re saying ‘okay, well, if we were to follow through on what the markets expect, then inflation will be below target’, which is their way very indirect to say ‘we don’t need to rise as aggressively as markets expect,’” Smith told CNBC on Tuesday.
“I think it will repeat itself, I expect it, and it should be seen as a sign maybe 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 trend set by the US Federal Reserve and European Central Bank, which hiked 75 and 50 basis points respectively in the month. last.
But while it may bolster the Bank’s inflation-fighting credibility, the faster pace of tightening will heighten downside risks for an already slowing economy.
Berenberg’s senior economist Kallum Pickering said in a note on Monday that Governor Bailey will likely carry a majority of the MPC’s nine members if he backs a 50 basis point hike on Thursday, and forecast that with the inflation which is likely to continue to rise, the Bank will increase another 50 bps in September.
“The outlook thereafter is uncertain. Inflation is likely to peak in October when the household energy price cap rises again. Amid mounting evidence that tighter monetary conditions are weighing on demand and core inflation, we expect the BoE to rise another 25 basis points in November, but take a break in December,” Pickering said.
Berenberg expects the Bank Rate to hit 2.5% in November from 1.25% currently, although Pickering said the risks on that call are on the upside. He suggested the BOE should be able to reverse some of the tightening in 2023 as inflation begins to reverse, and will likely cut the Bank Rate by 50 basis points next year with a further cut. by 50 basis points in 2024.
Increase in energy price ceiling
UK energy regulator Ofgem raised the energy price cap by 54% from April to cope with soaring global costs, but is expected to rise further in October as annual bills for household energy to exceed £3,600 ($4,396).
Barclays has always been cautious on bank rates, placing great faith in the MPC’s “early and gradual” strategy. However, Britain’s chief economist Fabrice Montagne told CNBC in an email last week that policymakers are now justified in acting “with force” as energy prices continue to soar. .
“In particular, soaring energy prices are fueling our Ofgem price cap forecast and will force the BoE to revise its inflation forecast upwards. Higher inflation for even longer is the kind of scenario that scares central banks because of the higher risks of persistence and fallout,” he said.
The British banking giant now expects a rise of 50 basis points on Tuesday, followed by 25 basis points in September and then a “status quo” at 2%.