Will we see another base rate rise this week?
Some experts predict the committee will hike the bank rate from 5.25% to 5.5%, which would be the highest the base rate has been since 2007. The bank raised the base rate for the 14th-month in a row in August to 5.25%.
A poll by Reuters found that 64 out of 65 economists questioned predicted the bank will hike the rate to 5.5% on Thursday.
Experts at Deutsche Bank are among those who think we’ll see a rise this week, and suggest it may not be the last rise this year.
Sanjay Raja, senior economist for Deutsche Bank, said: “Forthcoming data on inflation and wages will ultimately sway the MPC one way or another. But, given recent MPC speak, and our expected changes to the forward guidance, the bar may be higher for any upside surprises to force a 16th consecutive rate move. Put differently, while it may be a little too early to say, September’s likely hike may put bank rate at the peak of the hiking cycle.”
Financial markets also fully expect the Bank of England to raise the bank rate from 5.25% to 5.5% this week and are split on whether interest rates will be raised again, to a peak of 5.75% in this rate-hike cycle in early 2024.
Chris Arcari, head of capital markets at Hymans Robertson, said: “Given falls in energy prices between July and August in 2022, and rises between the same months this year, year-on-year headline inflation was expected to re-accelerate in August given a smaller downwards impact from energy prices. However, we do not expect this will be particularly influential on the outcome of the September meeting.
“Year-on-year core and services CPI inflation running at 6.9% and 7.4%, respectively, in July, and regular wage growth remaining at a record pace of 7.8% year-on-year in the three months to end-July, will be of more concern to the BoE and gives the MPC ample justification to continue raising interest rates in the face of genuine signs of domestically-driven inflation pressures.
“Despite further actual, and expected, increases in the BoE base rate, expectations of where interest rates ultimately peak in this cycle have fallen in recent months following July’s downside surprise in headline and core inflation. This has provided a little relief to the mortgage market, as fixed-term mortgages are determined by two- and five-year swap rates, or interest rate expectations, rather than the base rate.”
Two members of the MPS already effectively showed their hands at the last meeting by voting for a base rate of 5.5%, and in the intervening period there has been little data to change their minds. Record wage growth and inflation reading that is widely expected to tick up again may well persuade other committee members to join them
However, some pundits predict that the Bank of England will hold the base rate at 5.25% this week.
James Smith and Chris Turner, economists at ING, wrote on the ING Think blog: “Investors are pricing a 20% chance of a ‘no change’ decision, and that follows a series of comments from BoE officials that appear to be laying the ground for a pause.
“Policymakers will have had a keen eye on the Federal Reserve, which has succeeded in pushing back rate cut expectations with the so-called ‘skip strategy’. By drawing out its tightening cycle by pausing at every other meeting, the Fed has managed to keep the conversation about how many hikes we have left, rather than how long it will take before we get rate cuts. A similar strategy, whereby the BoE pauses in September but hints strongly that it could hike again in November, could be tempting for policymakers this week.”
ING’s view is backed up by Laith Khalaf, head of investment analysis at AJ Bell. He said: “Markets are banking on another rate rise from the Bank of England, but its own tea leaves suggest the central bank should pause rate hikes for the time being.
“In its latest monetary policy report, the Bank of England forecasts that inflation would fall below the 2% target in the medium term, whether it keeps interest rates on hold, or follows market expectations by raising them and then trimming them back further down the line. Given the pain higher interest rates inflict on consumers and businesses, if the ultimate effect on inflation is the same, it makes sense to keep rates on hold rather than heap more pressure on a fragile economy.”