LONDON (Reuters – Next week will see the Bank of England raise interest rates for the fifth consecutive time since December. It is the steepest rate increase in its history and likely to continue doing so as inflation continues to climb to double digits.
The UK is expected to be the poorest country in the global economy by 2023, but most investors and economists predict a BoE quarter-point rate increase next Thursday.
This would bring the Bank Rate up to 1.25%. It is its highest rate since January 2009 when Britain was hit hard by the global financial crises.
Even though the historical low expectations of British borrowing costs have been high, they have increased sharply in recent years. And this week was no exception when the European Central Bank raised rate hikes for its next two meetings.
Investors bet on the BoE’s Monetary Policy Committee raising the Bank Rate by 2% to September. This will then increase to 3% by March 2013. Economists are also increasing the accuracy of their predictions.
Sanjay Raja at Deutsche Bank (ETR:) Friday’s statement stated that rates are now likely to top at 2.5%. This is up from a prior call of 1.75%. Next week will see a 0.25% rise.
“We don’t expect a unanimous decision, however. He stated in a note sent to clients that instead of the risk being skewed toward a more divided MPC, at least three MPC members are looking for a greater 50 basis-point movement. A vote by one or more members could result in a much worse outcome.
Before the U.S. Federal Reserve, the BoE and other central banks began to reverse their pandemic stimulus in Dec. before they started to take steps to stop the inflation spike caused by the opening of the global economy following the coronavirus outbreak and Russia’s invasion in Ukraine.
However, British inflation reached a four-year high of almost 9% in April. This is nearly five times the BoE target of 2%.
Inflation is expected to rise above 10% in 2022. Regulated energy tariffs will go up by 40%. Consumers have already reduced their spending and there are indications of slowing down in the housing sector.
Andrew Bailey, Governor of the BoE stated in April that the BoE had to choose between fighting inflation and creating a recession. The BoE is now focusing on countering inflation, despite wage increases.
On Friday, a BoE survey showed that people expect inflation to increase by 4.6%. It is the highest level of records since 1999.
Rishi Sunak, the finance minister, has increased the amount of money given to households since the May central bank meeting. This helps to reduce the risk of recession and could increase inflation.
Sunak will receive billions of dollars of additional support as Prime Minister Boris Johnson struggles for his political future after being ousted by 41% Conservative Party legislators on Monday.
The risk of an escalated trade dispute post-Brexit between Britain, the European Union and other countries could increase inflation.
Capital Economics’ economist Paul Dales stated that investors are underestimating the possibility of a BoE half-point rate increase next week. He said this especially considering the strong economic growth and labor market data expected on Monday and Tuesday.
In a note to clients, he stated: “Either it is or not, we believe it will be very close with either the MPC voting 5-4 in favor of a 50-basis point increase or 5-4 in favour of a 25 bas point hike.”
On Friday, markets priced in the 30% probability of a BoE half-point movement on June 16th.