Bank of England braces for biggest rate hike in 27 years as inflation soars

LONDON – IN Bank of England On Thursday, it is widely expected to raise interest rates by 50 basis points, the largest increase since 1995.

Such a move would raise borrowing costs to 1.75% as the central bank battles soaring inflation and would be the first half-point increase since it became independent from the British government in 1997.

UK inflation hit a 40-year high of 9.4% in June As food and energy prices continue to rise, exacerbating the country’s historical cost of living crisis.

Bank of England Governor Andrew Bailey suggested Tough speech on July 19 That the Monetary Policy Committee could consider a 50 basis point hike, vowing there would be “no condition or reservations” in the bank’s commitment to bring inflation back to its 2% target.

a A Reuters poll last week He noted that more than 70% of market participants now expect a half-point rise.

James Smith, Developed Market Economist at a jobhe said that while economic data since June’s 25 basis point hike has not moved the needle significantly, the MPC’s previous commitment to work “aggressively” to bring down inflation, pricing the market more or less at 50 basis points at this point, means that Policy makers are likely to err on the aggressive side.

“However, the window for further rate hikes appears to be closing. Markets have already lowered expectations for a ‘peak’ bank rate from 3.5% to 2.9%, although this still means a 50bp rate hike. basis by December, plus more, Smith said.

“That still looks like a stretch. We’re starting to hit a peak in the bank rate at 2% (currently 1.25%), which means a 25 basis point rate hike in September before policy makers 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 a 25-point-per-second increase or at most 50-point increases beyond that.

Smith said the main points to watch for in Thursday’s report will be whether the bank will continue to use the word “vigorously,” and its outlook, which links market expectations to the bank’s models and the expected policy path.

If, as in previous iterations, forecasts point to unemployment and inflation accelerating below target in two to three years, markets could infer a more pessimistic message.

“Everyone takes that as a sign that they’re saying ‘OK, OK, if we want to track what the markets are expecting, inflation is going to be below target,’ which is their indirect way of saying ‘We don’t need to go up as hard as the markets are expecting,'” Smith told CNBC. Tuesday.

“I think this will repeat, I expect, and that should be taken as a bit of an indication perhaps that we are nearing the end of the tightening cycle.”

growth concerns

A more aggressive approach at Thursday’s meeting would bring the bank’s monetary tightening path closer to the direction it has set US Federal Reserve and the European Central BankWhich Execution 75 And the 50 basis points last monthStraight.

But while it may enhance the bank’s anti-inflation credibility, a faster pace of tightening will exacerbate downside risks to an already sluggish economy.

Berenberg Chief Economist Calum Pickering said in a note on Monday that Governor Bailey would likely hold a majority of the nine-member Monetary Policy Committee if he supported a 50 basis point rise on Thursday, and predicted that with inflation continuing to rise, the bank would raise the another side. 50 basis points in September.

“After that, the outlook is uncertain. Inflation is likely to peak in October when the household energy price ceiling will rise again. Amid mounting evidence that monetary tightening is weighing on demand and core inflation, we expect the BoE to rise by 25 points. Other bases in November but discontinued in December.

Berenberg expects the bank rate to reach 2.5% in November, up from 1.25% currently, although Pickering said the risks of this call are skewed to the upside. He noted that the BoE should be able to reverse some of the tightening through 2023 as inflation kicks in, and is likely to cut the bank rate by 50 basis points next year with an additional 50 basis points cut in 2024.

Energy price ceiling rises

British energy regulator Ofgem raised its energy price ceiling by 54% from April to absorb higher global costs, but is expected to rise further in October, with annual household energy bills. expect to exceed 3,600 pounds ($4,396).

Barclays Historically, it has been cautious about bank interest rates, which places a lot of confidence in the MPC’s “early and progressive” strategy. However, UK chief economist Fabrice Montaigne told CNBC in an email last week that there is now a case for policymakers to act “aggressively” as energy prices continue to rise.

“In particular, higher energy prices are fueling our expectations of the Ofgem price ceiling and will force the BoE to revise inflation expectations again. Higher inflation for a longer period is the type of scenario that frightens central banks due to higher persistence risks and spillovers.”

The British banking giant now expects a 50 basis point rise on Tuesday followed by 25 basis points in September and then the “status quo” of 2%.