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Bank of England to raise rates to 0.25% in Q1, possibly sooner

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© Reuters. FILE PHOTO – People pass the Bank of England in the morning, during the Coronavirus Disease (COVID-19), pandemic that swept through London, Britain on July 29, 2021. REUTERS/Henry Nicholls/File photo

Jonathan Cable

LONDON (Reuters] – Although the Bank of England will raise interest rates during the post-pandemic period, economists polled in Reuters’ survey believe the Bank of England won’t be the first to do so until the early part of next year. Markets are already pricing this in.

As its peer banks, the BoE cut borrowing costs by a record amount as the Coronavirus pandemic caused havoc on global economies. But above-target inflation will likely tip the Bank’s favor.

Andrew Bailey, BoE Governor, sent Sunday’s signal that the bank was ready to hike interest rates. A poll by the Bank of England showed sharply lowered expectations about when this would happen.

According to the poll, medians surveyed by Oct. 13-20 said that the bankrate would increase 15 basis points to 0.255% in February or March. But around one fifth said it would be on Nov. 4. This is consistent with market expectations.

Following Bailey’s remarks, rates forecasts were collected. Many economists indicated that they were reviewing the expectations of their clients and were not able to reply.

The first hike in September was not anticipated until the fourth quarter next year. Nearly 85% of those surveyed about risks to current forecasts said that it was more probable the bank would act sooner than expected.

Although inflation slowed to 3.1% last month, which is still above the bank’s target of 2.0%, it was likely to be a temporary relief for consumers, as supply-side constraints, made worse by Brexit, appear to persist.

Chris Hare from HSBC stated that the fact that underlying inflation did not rise further in September was consistent with our belief that market price adjustments for UK rate hikes are not justified by fundamentals.

“However, while our expectation is for the first bank rate rise next February, the ongoing inflation risks and an increasingly hawkish MPC means that the risks are tilted towards an earlier hike – December or possibly even November.”

TOO IMMEDIATELY?

According to the most recent poll, inflation will reach a peak of 4.0% in the next quarter, before dropping to 3.5%, 2.7%, and 2.2% the quarters after that. This is much more than was predicted one month ago.

Capital Economics advised clients that “for the next six month, the worsening product shortages and labor shortages will slow down the economic recovery while higher energy prices push up CPI inflation.”

Reuters poll graphics on the UK inflation, monetary policy and economic growth outlook: https://fingfx.thomsonreuters.com/gfx/polling/zjpqkeokmpx/UK%20graphic.PNG

The UK’s economy contracted 9.7% in 2020. This was its largest drop in 30 years. However, most of the restrictions that were imposed in order to stop the spread of coronavirus have been lifted and growth is now back on track.

The GDP growth forecast for this quarter was 1.1%, which is lower than the 1.5% predicted in our poll last month. This could be due to disruptions to supply chains caused by a shortage heavy-goods drivers.

According to 80 forecasts, 2021 growth would be at 6.8% (unchanged from September) and 5.0% in 2020 – an improvement over the previous 5.5% forecast.

Bailey stated that he believes the current spike in inflation is temporary and that a rise in energy prices will push it higher, making its climb longer.

BoE policymaker Michael Saunders advised households to prepare for “significantly earlier” interest rate increases as inflation pressure mounts.

Although market pricing indicates that borrowing costs will rise to 1.00% in August, economists are more cautious and predict that a second increase – only 25 basis points – won’t occur until the latter part of 2022.

This would place it ahead of the United States Federal Reserve which does not expect to increase borrowing costs before 2023 and the European Central Bank.

Some economists warned that the BoE might be moving too quickly.

Stefan Koopman, Rabobank said that unless strong indicators emerge that higher inflation will continue we would consider any rate increases in line with market expectations to be a policy error.

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