Britain’s central bank will decide on Thursday whether to join the Federal Reserve in triggering a bigger-than-expected interest rate hike.
The Bank of England could impose its biggest rate hike in 27 years by raising its key rate by half a percentage point to 1.75% as it grapples with inflation that soared in June to a 40-year high of 9.4%.
This is well above the UK government’s inflation target of 2%, and there are fears that inflation could hit 12% by October. As interest rates rise, borrowing money becomes more expensive, effectively reducing the amount of funds people have to spend. Raising rates is a key tool often used by central banks to control inflation.
To date, the bank’s monetary policy committee has sought to tackle soaring prices with a series of quarter-point hikes – five in total since the end of last year.
That compares with a more aggressive Fed, which raised rates 0.75% twice in a row after starting with a quarter-point hike in March — the first increase since 2018.
The European Central Bank, on the other hand, was one of the slowest to react, waiting until last month to raise rates, but with a hike half a point bigger than expected. This ended an era of negative interest rates, bringing the deposit rate down to 0.% from -0.5%.
In June, the MPC updated its forward guidance noting that the extent, pace and timing of any further tightening would depend on “indications of more persistent inflationary pressures”, with any evidence of such second-round effects forcing the committee to “act with force”. in response,” according to Sanjay Raja, senior economist at Deutsche Bank.
He wrote in a recent note: “We believe the criteria for ‘acting forcefully’ have been met. We expect the Bank of England (BoE) to hike rates by 0.5pp in August, bringing the Bank Rate to 1.75%. This would be the biggest rise in the single discount rate since 1995 and the biggest rise since the Bank’s independence.
He expects any outsized rate move to be accompanied by a “mildly hawkish” set of forecasts, with growth expectations for 2023 and 2024 likely revised higher due to what he described as a stronger fiscal policy and a weaker currency.
“Inflation projections, in the short to medium term, are also likely to be raised given the additional fiscal ammunition for the economy, alongside stronger near-term inflation in food, energy and services. .”
Write to Rupert Steiner at [email protected]