BETA filters Key events (1)Bank of England (4)UK (3)Andrew Bailey (3)BoE (2)MPC (2) Since last December, the Bank has already raised its key rate, the Bank Rate, from 0.1% to 1.25% in response to the rising cost of living. UK interest rates are rising But the Bank admits it will take time to work (monetary policy works with a time lag) — and it certainly hasn’t brought down UK inflation yet: UK inflation rate Analysts at ING say a 50bp hike looks highly likely, especially after Governor Andrew Bailey specifically put an increase of that size on the table in comments last month. ING explains: Granted, there is a chance we may just get another 25bp move, given that there is little in the recent economic data stream to suggest the BoE needs to move more aggressively than it did in June. However, concerns among hawkish committee members about a tight labor market and a weak pound point to a bigger move this week – especially given that’s what the markets are pricing in. Looking further ahead, ING is aiming for another 25bp hike in September before a pause, but accept that this may be a slight understatement. We highlighted last week that persistent labor shortages, as well as potential tax cuts depending on the outcome of the Conservative leadership contest, could ultimately see the Bank return another 25-50 basis points above what we had forecast. UK interest rates are set by a vote of the Bank’s nine-member monetary policy committee. Some are more willing than others to raise interest rates sharply. At the last meeting in June, three MPC members wanted a 50 basis point hike, but were outvoted by the other six who favored a smaller increase of a quarter point to 1.25%. Those three hawks were Jonathan Haskel, Catherine Mann and Michael Saunders (whose MPC term ends this month). Bloomberg rated Deputy Governor Dave Ramsden, Chief Economist Huw Pill and Governor Andrew Bailey as the most likely to join the hawks, while Deputy Governor Jon Cunliffe and Foreign Member Silvana Tenreyro were the least likely. Bloomberg Economics Spectrometer highlights an increasing likelihood that the Bank of England will raise interest rates by 50 basis points to 1.75% on Thursday https://t.co/ruMhgqcwoF — Bloomberg (@business) August 1, 2022
Introduction: Bank of England on verge of biggest rate hike since 1995
Good morning and welcome to our rolling coverage of business, the global economy and financial markets. The Bank of England could make a small piece of history today by raising the UK’s borrowing costs by the highest amount since Gordon Brown gave it control of interest rates 25 years ago. The Bank sets interest rates at midday and many (but not all) City economists are predicting a 50 basis point hike. This would raise the bank rate to 1.75%, from 1.25%. If so, it would be the first 50bp hike since 1995, 27 years ago, lifting rates to their highest level since December 2008. The sharp rise in borrowing costs could push the UK closer to recession. But the Bank’s Monetary Policy Committee could take the plunge in a bid to tame inflation – now at a 40-year high of 9.4%, well above its 2% target. Governor Andrew Bailey set the scene last month, telling a City audience that the Bank could abandon its policy of raising rates in quarterly increments. In a speech at the Mansion House in London, Bailey said: “Let me be quite clear: there are no ifs or buts in our commitment to the 2% inflation target. This is our job and this is what we will do.” The MPC has already raised UK interest rates by 0.25 percentage points five times this year, and a Reuters poll this week found that more than 70% of 65 economists expected a half-point increase today. Katharine Neiss, chief economist at PGIM Fixed Income, says the BoE may use today’s meeting to make one more final, substantial rate hike before the economy begins to soften substantially. There are already signs that the UK economy is starting to cool, says Neiss, adding: There is still much uncertainty about how the recent energy price and inflation shocks will affect economic activity, as well as the cumulative effect of the BoE’s interest rate hikes since last December, as it will take some time for to be completed. There is broad agreement that the economy is set to cool further, but what remains an open question is how much, and that will determine the course of policy going forward. It’s already been a summer of sharp rate hikes, with the European Central Bank raising its key rate by 50 basis points last month and the US Federal Reserve by 75 basis points in June and July. A winter of misery is upon us, with inflation soon moving into double digits. Yesterday, the Resolution Foundation thinktank predicted that the UK’s annual inflation rate could hit 15% in early 2023, due to further sharp rises in energy prices. This will increase the pressure on households, particularly the poorest, who need more help from the government to get through the coming months. Resolution’s Jack Leslie has warned that the jump in gas prices since the start of the war in Ukraine means UK energy bills could reach £3,600 by early 2023. Consumer price inflation will now peak higher and later than the Bank of England previously thought, with CPI inflation running reasonably well above 15 per cent next year (absent government action to cut prices). Higher and more persistent inflation both mean the Bank of England faces a prolonged period of difficult policymaking. Most importantly, low- to middle-income families are likely to face disproportionately higher cost-of-living levels for the foreseeable future. But in terms of consumer prices, any recent declines in commodity prices have been more than offset by the huge rise in gas prices in Europe. The energy price cap is now set to reach around £3,600 in the new year – almost 4 times the typical level before 2022. pic.twitter.com/4NgRFRPT9q — Resolution Foundation (@resfoundation) August 3, 2022 This means that peak inflation will be higher than previously thought – and last longer. Forecasting inflation based on the dynamics of historical time series of inflation indicators (plus the expected peak in energy prices) suggests that CPI inflation could reasonably reach 15%. pic.twitter.com/e45Bi6nlV8 — Resolution Foundation (@resfoundation) August 3, 2022 The Bank will release its own economic forecasts at midday and is expected to show inflation running higher than expected three months ago.
THE AGENDA
8.30 am BST: Eurozone construction PMI for July 9 a.m. BST: UK car sales for July 9.30 am BST: Eurozone construction PMI for July 12 pm. BST: Bank of England rate decision 12.30 p.m. BST: Bank of England rate decision
