The Bank of England looks set to raise rates by a quarter point to a 15-year high of 4.75% on June 22, its 13th straight rate rise, as it fights unexpectedly sticky inflation that risks making the U.K. a global outlier. Inflation accelerated last month, but the central Bank’s policymakers will be encouraged by signs that higher energy costs are easing and the impact of a slump in global food prices is wearing off, boosting its chances of hitting its 2 percent target.
“The direction of travel is the right one – higher rates – but perhaps not as high as markets are expecting,” Katharine Neiss, chief European economist for investment firm PGIM and a former BoE official, said. A Reuters poll this week predicted the Bank would raise rates just twice more, reaching a peak of around 5% by August or September.
But the BoE’s head of policy, Andrew Bailey, signaled that households could face more pain if the Bank sticks to its current path, which would see interest rates rise to 5.25% by next year and knock 3% off gross domestic product. The move would be painful for 1.3 million homeowners reaching the end of their fixed-rate mortgages this year and millions more due to do so next year, as well as businesses paying rising interest on loans.
Markets have lowered their expectations of the peak of interest rates to 4.5% by next year, though some economists think they may be too low. Samuel Tombs, the head of U.K. macroeconomic research at Pantheon Macroeconomics, says that the Bank of England might sanction a 50 basis point hike this year to bring the peak within sight.
The Bank’s nine unelected policymakers will have to keep raising interest rates to slow a run of robust economic data that shows double-digit inflation is feeding through into wages, which are increasing more quickly than the economy can grow. But the pace of the rises is unlikely to accelerate, as the doves on the MPC have said such a move would smack of panic or a loss of control.
Investors this week bet the Bank of England might hike rates as high as 6% this year — well above where the U.S. Federal Reserve or the European Central Bank are expected to go, and a level not seen in Britain since 2000. MPC members will have to weigh the benefits of a faster rise against the risk that it might fuel another global recession, leaving the country’s economy with the worst slump since World War Two and forcing households to pay more for their debt. MPC minutes released on Thursday show the Bank is considering a range of measures to reduce the risk of overheating, including cutting its bond-buying program. The MPC meets again on July 10.
