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Bank of England to hike rates for seventh consecutive time on Thursday

Economic Indicators Sep 18, 2022 12:10
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The Bank of England’s Monetary Policy Committee is widely expected to raise interest rates again when it gathers for this month's delayed meeting on Thursday.

In August, rates were hiked by 0.5 percentage points to 1.75% in what was the biggest single increase in 27 years.

Last month’s decision was the sixth consecutive time the MPC has voted in favour of upping interest rates, with economists and investors expecting a seventh.

The base rate stood at 0.1% until December last year, which was when the first rise was implemented by the Bank.

Interest rates are often raised to offset soaring inflation, which in August dipped to 9.9% based on the consumer prices index, which was down from July's 40-year high of 10.1%.

Raising rates is designed to incentivise people to save rather than borrow and spend, which should – in theory – drag prices down.

The BoE has forecast CPI will peak at 13% in the fourth quarter of 2022, while economists at Citigroup (NYSE:C) and Goldman Sachs (NYSE:NYSE:GS) have estimated inflation would eventually reach a peak of 18% or even 20%.

However, since these predictions were made, new prime minister Liz Truss has capped energy bills at £2,500 for two years, which is below the planned price cap of £3,549 at the time of the Citi and Goldman forecasts.

Because of the PM's intervention inflation is not expected to not hit such highs.

This could help the economy avoid a long recession but is not anticipated to avert more potential interest rate rises in the coming year or two, as it is predicted to make it difficult for inflation to return to normal.

While this might be thought would result in the MPC feeling less drastic action is needed with rate increases, this is not the case.

The market is still betting on another half-point hike to 2.25%, with a 40% chance of a 75 basis point move next week.

“A 75 basis point rate hike next week is a very real possibility,” Hugh Gimber, global market strategist at JPMorgan (NYSE:JPM) Asset Management, commented.

Believing inflation will now continue to fall, this “will in our view remove support for a prolonged hiking cycle,” said Barclays (LON:BARC) economist Fabrice Montagne, forecasting rates will reach a peak of 2.5% in November.

Others see rates going much higher, with Nomura estimating the MPC will raise the rate to 3.75%, revised up its previous forecast of 2.5%, while NatWest (LON:NWG) Markets added a 0.5pp to its outlook – now at 3.5%.

Capital Economics said this week it thinks the BoE will hoist rates to a peak of 4.00% next year, up from its previous forecast of 3.00%.

The average forecast from analysts and economists is for rates to reach a high of 2.50%, while financial markets are pricing in a 4.5% peak.

Read more on Proactive Investors UK

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Bank of England to hike rates for seventh consecutive time on Thursday
 

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