Bank of England set to hike rates again as inflation heads towards 10%

The Bank of England (BoE) building is reflected in a sign, London, Britain, December 16, 2021. REUTERS/Toby Melville/

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  • BoE set to hike rates for 5th time since December
  • Most investors expect another quarter-point rise
  • Nearly 50% chance of a bigger half-point hike, depending on the markets
  • The BoE torn between soaring inflation and slowing growth
  • Announcement scheduled for 11:00 GMT

LONDON, June 16 (Reuters) – The Bank of England appears set to ignore concerns about a sharp slowdown in Britain’s economy and raise interest rates again on Thursday as it tries to fight a rising interest rate. double-digit inflation.

After the US Federal Reserve raised borrowing costs the most since 1994 with a 75 basis point rate hike on Wednesday, the big question for investors awaiting the BoE’s policy announcement in June at 11:00 a.m. GMT is the magnitude of the increase.

Financial markets are fully pricing in a quarter percentage point increase in the Bank Rate to 1.25%.

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But investors put a nearly 50% chance of a BoE half-point hike, something it hadn’t done since 1995.

The BoE has already raised borrowing costs four times since December, when it became the first of the world’s major central banks to hike rates after the coronavirus pandemic.

Britain, more than many other rich countries, faces a mixture of high inflation and no growth or recession.

Its economy is already showing signs of slowing and next year will be the weakest of the world’s major rich countries, according to forecasts by the International Monetary Fund and the Organization for Economic Co-operation and Development.

But inflation, which hit a 40-year high of 9% in April, is expected to top 10% later this year, more than five times the BoE’s 2% target, according to the central bank’s latest forecast. .

These forecasts could still prove too low after a recent fall in the value of the pound which will add to the cost of imports, mainly oil and gas.

“Britain is stuck in the worst of both worlds and that’s what makes policymaking so difficult,” said Luke Bartholomew, senior economist at investment firm abrdn.

“There is still a tricky period ahead with soaring inflation and slowing growth.”

Part of Britain’s inflation problem is the country’s mechanism for regulating domestic electricity prices, which means that rising prices are likely to last longer than elsewhere.

Britain is also suffering from a severe shortage of workers to fill vacancies, which is driving up wages for some and could fuel the fire of inflation.

Then there is the unfinished business of Brexit. Britain and the European Union are at odds again, which could lead to higher trade barriers with the bloc and higher prices.

The BoE is likely to signal again on Thursday that its slew of rate hikes will continue, although last month it suggested investors were going too far by setting the bank rate at 2.5% by March. middle of next year.

Since then, those bets on rising rates have risen again, with markets pricing the discount rate near 3% as early as December.

The rise is partly due to expectations of more government aid for the cost of living after Finance Minister Rishi Sunak announced new support in May and Prime Minister Boris Johnson sought ways to bolster his popularity falling.

David Zahn, head of European fixed income at Franklin Templeton, said yields on short-term UK government bonds probably only had a little more room to rise.

“I think we’re getting very close to the inflection point where the central bank will probably have to stop walking,” he said. “The Bank of England might do one or two more (rate hikes), but I think we will be in recession later this year in the UK.”

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Additional reporting by Dhara Ranasinghe

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