- The BoE plans to hike rates from 3.5% to 4% on February 2nd
- Economists only see another rate hike to 4.25%
- Inflation is starting to fall, underlying pressures are strong
LONDON, Jan 26 (Reuters) – The Bank of England is on track to hike its main interest rate by half a percentage point to 4% on February 2, but economists will be keen for signals that this will mark the 10th straight hike one of the last of the BoE.
The BoE was the first central bank in the big economy to start tightening in the wake of the COVID-19 pandemic, raising interest rates from a record low of 0.1% in December 2021.
But UK inflation hit a 41-year high of 11.1% in October, in large part due to the Russian invasion of Ukraine. At 10.5% in December, inflation is further from its 2% target than in the United States or the Eurozone.
Forecasts by economists polled by Reuters and pricing in financial markets suggest the BoE will hike rates by another half-point to 4% on February 2nd, the highest since 2008, although the risk of a lower one increase to 3.75%.
After that, most economists see only one more rate hike – to 4.25% in March – as financial markets price in the tightening cycle, which ends at 4.5% mid-year.
“We will be vigilant for signs that the Committee is nearing the end of the growth cycle,” UBS economist Anna Titareva wrote in a note to clients on Thursday.
The US Federal Reserve – which also meets next week – is also likely to end its tightening cycle soon, while the European Central Bank is further from reaching the limit of its rate hikes.
Reuters graphics
DIVIDED COMMITTEE
The Monetary Policy Committee (MPC) split in three directions in December when it backed a 50 basis point hike. Two members – Silvana Tenreyro and Swati Dhingra – voted to end rate hikes, while Catherine Mann supported a larger three-quarter point move.
Economists see a similar split next week, reflecting uncertainty about how fast inflation will fall in 2023-2024 and whether it risks bottoming out above the BoE’s 2% target.
Natural gas prices are lower than a year ago and well below the BoE’s assumptions in its latest forecasts in early November.
Gov. Andrew Bailey said there was “more optimism” that inflation would come down quickly.
Economists expect the BoE to cut its forecast for inflation at the end of 2023 to 3-4% from over 5% in November.
The weak economic outlook is also weighing on inflation – although a recession appears to have been avoided in the second half of 2022 – and much of the impact of the BoE’s rate hikes has yet to be felt.
About 2.7 million homeowners with short-term fixed-rate mortgages will pay at least £100 ($124) more a month after refinancing at higher rates this year, the BoE predicts.
WORKING PRESSURE
However, BoE chief economist Huw Pill has warned that inflation is not guaranteed to return to target without further rate hikes.
Pill saw some signs of a slowdown in the labor market, but non-bonus wages rose at the highest rate since records began in 2001 in the three months to November, excluding the period affected by government pandemic support measures.
The 6.4% annual increase was about twice as fast as before the pandemic, when inflation was hovering around 2%.
Core inflation — which excludes changes in volatile food and energy prices — did not fall in December, while services inflation was the strongest since 1992, both factors suggesting companies are trying to rebuild profit margins.
The BoE has also pointed out how the post-Brexit rules that came into force two years ago have made the UK economy less efficient, shielded some firms from competition and made it harder to hire migrants from the European Union to fill low-paying positions occupy.
Economists expect the BoE to be cautious about directly signaling that it is almost done with rate hikes – although it may tone down talk about the likelihood of future “huge” rate hikes of half a point or more.
“The MPC is likely to maintain its risk-averse approach,” said Andrew Goodwin of consultancy Oxford Economics.
($1 = 0.8067 pounds)
reporting by David Milliken; Editing by Nick Macfie
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