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BoE official says base rate likely to rise again but some experts disagree

Nick Cheek
Written By:
Nick Cheek
Posted:
Updated:
24/02/2023

After ten straight base rate rises, many in the market believed that February’s uplift would be the last. However, a senior Monetary Policy Committee (MPC) member has indicated that there could be more to come.

At the beginning of the month, the Bank of England (BoE) raised the base rate to 4%. The move was widely expected and it took the rate to its highest level for more than 14 years.

However, with inflation decreasing, many economists and experts felt this would be the last rise for a while. But, according to Catherine Mann, a senior policymaker at the MPC, there will likely to be further increases in the ongoing battle to reduce inflation.

Speaking at the Resolution Foundation earlier this week, Mann noted that inflation was still too high and the risks posed by this meant that the BoE was more inclined to raise the base rate than to cut.

She said: “[Monetary] tightening…likely is needed to ensure the effectiveness of monetary policy to achieve the objective of two per cent sustainably in the medium term.”

Mann added that any pivot on policy was unlikely given the current economic data, noting that “a preponderance of turning points is not yet in the data”.

She concluded that: “We have an inflation remit, and we will achieve it one way or another. Failing to do enough now risks the worst of both worlds – higher inflation and lower activity – as monetary policy will have to stay tighter for longer to ensure that inflation returns sustainably back to the two per cent target.”

Some market sentiments tend to back her view. Reuters noted that: “Financial markets pointed to a 95% chance of an increase in bank rate next month, up from 90% early this week.”

Differences of opinion on base rate rises

However, there are other experts that are more benign in their outlook for the base rate in the coming months, although there may still be movement in March.

Sanjay Raja, senior economist at Deutsche Bank said: “We expect dovish voices on the MPC to grow louder over the coming meetings.

“In our view, a March hike will likely be the last before the MPC positions itself more explicitly for a ‘conditional pause’ in the hiking cycle as more of the policy effects from rate hikes feed through into the real economy.”

There are also those who feel rates hikes are at an end, at least for the time being.

Samuel Tombs of Pantheon Macroeconomics said: “Investors no longer see a 25 basis point (bp) increase in bank rate at the MPC’s next meeting on March 23 as a done deal, in the wake of January’s CPI report, but still are attaching an 85% probability to the hike.

“This looks far too high to us, given that January’s data strongly support the MPC’s view — expressed clearly via its forecasts — that the headline rate of CPI inflation will fall back to the two per cent target quickly without raising bank rate further.”

“We stand by our forecast that the Committee will keep bank rate at 4% next month, and all other meetings this year, though the risks still are tilted towards one final 25bp hike.”