August 2, 2023

The Bank of England is expected to raise interest rates by 0.25 percentage points to 5.25% on August 3, with a possibility of a repeat of June’s surprise 0.5 percentage point hike due to persistent inflation concerns. In contrast, the U.S. Federal Reserve and the European Central Bank have recently increased rates by 0.25 percentage points and are seen as nearing the end of their rate-tightening cycles.

Investors are uncertain about the peak of BoE rates, which have fluctuated since the last rate move in June. The uncertainty arises from concerns about Britain’s inflation problem and whether rapid price growth will slow down as seen in other economies. The extent of second-round effects, such as the impact of last year’s surge in energy costs on wages and prices, will determine the future rate decisions.

Expectations for peak BoE rates reached 6.5% after record wage growth, but they decreased following a larger-than-expected decline in consumer price inflation. Investors are now divided between predicting a peak of 5.75% or 6% later this year or in early 2024.

The rise in rate expectations has led to the highest mortgage costs since 2008, impacting sectors like house-building. Private-sector growth has also slowed to a six-month low, according to a recent survey.

Most economists foresee a rate increase to 5.25% next week, peaking at 5.75%. However, the decision remains balanced for many. HSBC economists expect a rate rise to 5.5%, marking the central bank’s 14th consecutive hike.

BoE Governor Andrew Bailey emphasized the importance of curbing inflation, and Deputy Governor Dave Ramsden noted that inflation remained “much too high,” indicating a commitment to address the issue.

Source: Reuters
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