‘Last major increase’ to Bank rate predicted this Thursday
Major players from across the financial services industry including ING, Deutsche Bank and Canada Life are all in agreement about where the Bank of England base rate will land on 2 February. And there is also consensus on what the future will bring.
Analysts at ING stated that their base case was an increase of 50 basis points (bps), seeing the base rate reach 4%. This would be the first time rates hit that figure since 2008.
ING said: “We expect a 50bp rate hike for the second consecutive meeting. While the minutes of the December meeting appeared to open the door to a potential downshift to a 25bp move in February – and this meeting looks like a closer call than markets are pricing – the reality is that the recent data has looked relatively hawkish.”
Analysts at Deutsche Bank agree with this assessment and feel this will be the last major increase in this cycle.
It said: “We expect the MPC to raise bank rate to 4% (50bps) in February – likely its last ‘forceful’ hike in the tightening cycle. Why the need to go big? First, wage growth continues to outpace Bank and market expectations. Second, services inflation has strengthened further, outstripping Bank forecasts. Third, price pass-through remains historically elevated. And fourth, better growth prospects are likely to keep price pressures more elevated. Risks to our call are tilted to the downside, however.”
Steve Matthews, liquidity fund manager, Canada Life Asset Management, also echoed this sentiment.
He said: “We expect the Bank of England (BoE) to raise its base rate by 50bps on Thursday to take it to 4%.”
A wider survey of economists by the Reuters news agency also came to the same conclusion.
Reuters said: “The Bank of England will lift the bank rate by 50bps on Feb 2. A firm majority, 29 of 42 respondents to the poll, said the Bank would add 50 basis points next Thursday. Thirteen opted for a more modest 25bps rise.”
What the future holds
Looking beyond February, the majority of analysts and experts believe that the rate hiking cycle is coming to an end. The Reuters survey noted that the Bank was likely to add another 25bps in March before pausing.
Matthews agreed: “Whilst we believe that the current economic outlook combined with wage growth sustaining the elevated inflationary picture justifies a 50bp rise this time around, we think there is cause for optimism that we are approaching the peak with one further 25bp hike to come this spring.”
Meanwhile, Paul Hollingsworth, chief European economist at the French bank BNP Paribas, noted that while the end of the cycle is coming, rates were likely to stay at their current level for a while to come.
He was quoted in The Guardian as saying: “We still believe that the end of the tightening cycle is nearing. Soon, we expect the MPC to shift from increasing rates to emphasising that rates will need to stay at elevated levels for a long time in order to bring down underlying inflation.”