Daily Management Review

After A Surprising Increase In Inflation, The Bank Of England Is Set To Raise Rates Again


After A Surprising Increase In Inflation, The Bank Of England Is Set To Raise Rates Again
One day after showing evidence that it had made progress in addressing Britain's high inflation issue, the Bank of England is expected to announce if it is ending a series of interest rate increases that dates back to December 2021.
As soon as official statistics revealed a surprising slowdown in the rate of price growth on Wednesday, investors flocked to wagers on the BoE retaining the Bank Rate at 5.25%.
A pause by the BoE is now expected to happen about 50% of the time, up from just 20% on Tuesday, when Goldman Sachs and other banks abandoned their previous calls for one more rate increase.
After the recent spike in global oil prices, several experts said they still believed a final BoE rate hike was the most likely result, although they emphasised it could go either way.
"We stick with our call for a hike, but now see this as a coin toss," JP Morgan economist Allan Monks said.
Andrew Bailey, governor of the Bank of England, and his other members of the Monetary Policy Committee have come under heavy fire since October of last year, when consumer price inflation topped 11%.
Inflation, which was 6.7% in August, is now heading in the direction of the 5% level that the BoE anticipates for the upcoming months and that British Prime Minister Rishi Sunak promised people in the run-up to an expected election next year.
It is still the greatest among the Group of Seven economies and exceeds the BoE's 2% target by more than three times.
While they might be nearing the pinnacle of their rate hiking cycle, Bailey and other officials have emphasised in recent weeks that they would likely have to keep borrowing prices at current levels for a long, shattering hopes of speedy cutbacks.
The problem for the BoE will likely be to persuade investors that it will stay to its guns and not hurry to cut rates even when Britain's already fragile economy shows symptoms of weakness, whether it rises rates one more time or not.
"While the BoE will no doubt try to project a 'higher for longer' message, as the ECB has since its rate hike last week, history tells us that once the peak is in, forward rates move notably lower," Dominic Bunning, head of European FX Research at HSBC, said in a note to clients.
The BoE is concerned that wages have so far withstood the general economic slowdown and are rising at a record rate, posing a danger to its efforts to reduce inflation.
British inflation is almost twice as high as American inflation, where the Federal Reserve on Wednesday decided to maintain borrowing costs at current levels.
Last week, the European Central Bank increased interest rates to a record level while also indicating that a halt was likely.
On Thursday, the BoE is expected to make its statement, but there won't be a news conference.
The central bank is anticipated to announce its decision on interest rates as well as the next step in a scheme to shrink the stockpile of government bonds that it built up over a 15-year period to support the economy during the global financial crisis and the COVID-19 pandemic.