The Bank of England is expected to raise interest rates to 5.25% as concerns over inflation continue to mount. Economists and markets are divided on whether the central bank will opt for a quarter-point increase or a repeat of June’s surprise half-point hike. While the U.S. Federal Reserve and the European Central Bank have recently raised rates, the Bank of England is seen as being further away from the end of its rate-tightening cycle.
The uncertainty surrounding the peak of Bank of England rates has led to fluctuating expectations. Following data showing record wage growth, some investors believed rates could reach 6.5% by July. However, these expectations tempered after consumer price inflation declined more than expected. Now, market sentiment is split between a peak of 5.75% or 6% later this year or early in 2024.
The surge in rate expectations has had an impact on mortgage costs, which have risen to their highest level since 2008. Moreover, higher rates have started to weigh on the housing sector and other industries. A recent survey indicates that private-sector growth has fallen to a six-month low.
Most economists polled by Reuters predict a rate increase to 5.25% from the current 5%, with a peak at 5.75%. However, opinions remain divided on the final decision. Some economists believe that the Bank of England will want to send a strong signal on inflation and therefore forecast a rate rise to 5.5%.
Bank of England Governor Andrew Bailey emphasized the importance of curbing inflation, and Deputy Governor Dave Ramsden stated that inflation remained much too high despite recent falls. In June, consumer price inflation dropped to 7.9%, aligning with the Bank of England’s May forecast but still four times higher than the central bank’s target of 2%.
The labor market in Britain presents a mixed picture. Wage growth, excluding bonuses, has remained steady at an annual rate of 7.3% in the three months to May. However, unexpected unemployment growth and a reduction in job vacancies pose additional challenges.
Silvana Tenreyro’s departure from the Monetary Policy Committee leaves fellow external member Swati Dhingra as the main advocate for using producer price inflation as a better guide to future consumer price inflation trends than wage growth.
The Bank of England will announce its growth and inflation forecasts alongside the rate decision. Due to heightened market rate expectations, both forecasts are expected to be lower than in May. The International Monetary Fund predicts Britain’s economy will grow 0.4% this year, making it the second-slowest among the Group of Seven advanced economies.
The Bank of England’s recent emphasis on the risk of inflation persistence not captured in its medium-term forecast complicates the interpretation of its future rate decisions. HSBC argues that if the Bank of England believed its own forecasts, it would be cutting rates instead of raising them.
In conclusion, the Bank of England’s decision to raise rates to 5.25% amid inflation concerns reflects the ongoing debate over Britain’s inflation problem and the potential impact of rapid price growth. The decision is finely balanced, with economists and markets divided on the extent of the rate hike and future rate increases. The outcome will have implications for various sectors, including housing and private-sector growth, as well as for mortgage costs and consumer confidence.
