A general view of the Bank of England (BoE) building. The Bank of England confirms interest rates hike to 1.75%, in London, Britain, August 4, 2022. REUTERS/Maja Smiejkowska // File Photo Obtaining licensing rights
LONDON, Sept 17 (Reuters) – The Bank of England is likely to raise interest rates again this week, perhaps the final step in one of the biggest monetary policy tightening cycles in the past 100 years, as the economy’s slowdown begins to worry policymakers.
All but one of the economists polled by Reuters in recent days expected the Bank of England to raise interest rates to 5.5% on Thursday from 5.25%, which would mark its highest level since 2007.
Financial markets are less confident than economists – with interest rate futures on Friday showing a 25% chance of a pause – but both are arriving at a view that the string of rises in borrowing costs since December 2021 is in its final days.
If the bank rate peaks at 5.5% – from a starting point of 0.1% – it will rank fourth on the list of Britain’s biggest monetary policy tightening cycles in the last century, after increases in the late 1980s and early and late 2000s. -The seventies.
Recession has been accompanied by all those previous sharp interest rate hikes – and deflation is increasingly on the minds of the Monetary Policy Committee (MPC), with the 14 interest rate hikes it has already made so far fully visible in the real economy.
Much of the data released last week confirmed Governor Andrew Bailey’s comment this month that the Bank of England was “much closer” to ending the tightening cycle.
Economic output in July fell more sharply than expected, even if one-off factors such as strikes were behind some of the decline, and the unemployment rate actually beat the Bank of England’s forecast for the third quarter as a whole.
The ECB also cited a weak economic outlook when it raised interest rates last week and indicated that this would be the last such move in the current session.
But with Britain’s inflation rate still higher than any other major advanced economy, the calculations for Bank of England officials are more complicated – with hot wage growth data in Britain still pointing to inflationary risks.
“While we expect the committee’s critical mass to be gathered around a 25 basis point increase, the uncertain and finely balanced nature of the turning point in the cycle means we believe there will be dissenters on both sides,” Jack Seng said. Chief Economist at Barclays Bank in the UK.
Data between now and Thursday’s announcement could change the debate.
August inflation figures due on Wednesday are likely to buck the downward trend thanks to higher gasoline prices.
Investors will be wary of the Bank of England’s tendency under Bailey to respond aggressively to higher-than-expected inflation rates – an approach that some economists say has slowed economic growth. It was undermined Their ability to deliver a consistent message and control market prices.
As always, the language the MPC uses on the future path, and the changing balance of opinion, can have a significant impact on the market.
Benjamin Nabarro, chief UK economist at Citi, said a speech last week by Catherine Mann, the most hawkish member of the Monetary Policy Committee – in which she warned against halting interest rates – may provide an early clue.
“Mann’s explicit response against the pause, and the rebuke associated with the majority rulings in the MPC, is, we believe, a sign of an internal debate moving against it. The pause is therefore, we believe, part of the discussion.”
Edited by Catherine Evans
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