The Bank of England is expected to raise interest rates to the highest level since the 2008 financial crisis, despite concerns about an economic slowdown and the cost-of-living crisis.
The Old Lady of Threadneedle Street will likely raise interest rates by at least 25 basis points (bps) as already noted in the last meeting.
Base rate to increase to 1%
Markets widely expect the Bank to increase its base rate to 1% on Thursday, raising borrowing costs to the level set in February 2009. Households are under pressure from soaring living costs due to higher petrol prices and rising gas and electricity costs exacerbated by the war in Ukraine. Consumer prices could even reach 10% later this year, which is five times the Bank’s inflation target of 2%.
High inflation is a global concern with central banks around the world raising rates to tackle inflationary pressures. On Wednesday the US Federal Reserve raised its benchmark interest rate by 0.5% to a target rate range of between 0.75% and 1%.
Bank of England’s 4th rate rise in a row
Analysts expect the BoE’s Monetary Policy Committee (MPC) to vote for a fourth consecutive rate rise since December when it raised borrowing costs for the first time following the Covid pandemic. By increasing the rates to 1%, the Bank could begin selling some of its £875bn portfolio of government bonds which it created via its quantitative easing stimulus programme since the 2008 financial crisis.
The Bank is not expected to take immediate action but announce preparations for future asset sales, due to high volatility in the markets.
Analysts expect some of the members of the MPC to push for a 0.5% rate rise to show their determination to stop inflationary pressures from becoming entrenched, but a quarter-point rise remains the most likely outcome.
There are concerns that persistently high inflation could lead to a recession if the increasing cost of living, higher taxes and borrowing costs damage UK consumer spending.
Recently, weak economic data disappointed markets and raised fears after the decline in March of retail sales and lower consumer confidence in April.
Kallum Pickering, a senior economist at Berenberg, warned that weak consumer confidence and evidence of diminished household demand is risky when raising interest rates. As he stated, “If we are unlucky, the UK is already in the early stage of a recession.”
How will the pound react?
The MPC voted 8-1 in favour of a 25 bps rise in March, with one person voting against. The pound could fall today, if there is any sign of widening disagreement among the MPC members to keep the interest rate unchanged, as it would mean that the rate hike cycle is close to a pause.
If the BoE delivers a hawkish outcome, then this will be a positive development that will push the pound higher and offer support. However, a cautious policy tightening outlook will hurt the pound.
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