The Bank of England (BOE) will today unveil its latest interest rate hike. This is the 10th straight hike from the central bank in its fight against inflation. Markets anticipate that the central bank’s base rate will rise by 0.5% to 4%, its highest level since the 2008 financial crisis. Some, however, expect a smaller hike of 0.25%.
Due to a lack of convincing evidence of inflation going down, Matthew Ryan, head of market strategy at Ebury, predicts a 50bp interest rate increase. Ryan stated,
“Since the December meeting, we think that macroeconomic news out of the UK has mixed ramifications for monetary policy though, on balance, we are pencilling in another 50bp rate increase this week.”
The unemployment rate is almost at its lowest level since 1974. However, the housing market is cooling quickly and consumer and employer confidence is poor. Public sector employee strikes have exacerbated the pessimism in an economy still adjusting to Brexit and the coronavirus outbreak. Underlying inflation has not fallen and salaries are growing at the fastest rate ever.
The danger that price growth could halt above the BoE’s 2% target has been highlighted by BoE Chief Economist Huw Pill.
The U.S. Federal Reserve reduced the pace of interest rate increases on Wednesday with a quarter-point adjustment. However, the FED stated that it anticipates the need for more hikes. Today, the European Central Bank is also expected to increase interest rates by a half-point to 2.5%. In the UK, investors anticipated that rates would peak at about 5.25% in the months leading up to the BoE’s November meeting.
When will interest rates cool in the UK?
The BOE is anticipated to state that the GDP would decline less in 2023 than its 1.5% hit prediction from November. The International Monetary Fund predicted earlier this week that the British economy will contract by 0.6% this year. With recent drops in gas prices and an increase in the value of the pound expected to cut inflation later this year, the BoE’s inflation predictions are also likely to shift.
Although inflation decreased to 10.5%, it is still very near a 40-year high. Finding cheap loans is a struggle that is killing off businesses. Energy price declines have helped to bring inflation down. However, there are concerns that persistently high wage growth may keep it well beyond the BoE’s 2% target. With no sign of inflation drastically decreasing, interest rates are not expected to cool anytime soon.