The Bank of England is almost certain to raise borrowing costs on Thursday, nearly all economists polled by Reuters said, marking the third consecutive meeting where it has raised the bank rate as it continues its exit from the pandemic support.
Like most central banks, the BoE slashed interest rates to a record low as the coronavirus swept the world, but it is now facing runaway inflation, which has hit a nearly 30-year high of 5 .5% in January and is expected to increase further.
It was the first major central bank to raise interest rates since the start of the pandemic two years ago. The US Federal Reserve is expected to act on Wednesday and last week the European Central Bank paved the way for a hike later this year.
The Monetary Policy Committee will add another 25 basis points to the Bank Rate this week, bringing it to 0.75% – its pre-pandemic level – according to 44 of 49 economists polled by Reuters from March 10-14. The other five said there would be no change.
In January, the UK economy grew much faster than expected, expanding by 0.8% according to official data last week. But Russia’s invasion of Ukraine added more uncertainty in an environment where high inflation had already made it difficult for the Bank to negotiate.
“The economic consequences of the war in Ukraine have worsened the already delicate mix between soaring inflation and slowing GDP growth,” said Paul Dales of Capital Economics.
Still, the Bank is expected to continue this week’s increase with another 25 basis points rise in the next quarter and a corresponding increase in the third quarter, according to polling medians.
It will then raise the bank rate to 1.50% at the start of next year, the median showed, although that rate was chosen by 15 of 44 economists, while 21 saw it lower and eight more high. In February, it was not expected to arrive there before 2024.
Asked about the risk to their forecast for interest rate hikes in the current three-quarter cycle, 14 of 18 economists said it was the Bank rising faster than they had expected. Four said it was the opposite.
Four of nine MPC members voted for a 50 basis point hike last month, but none of the economists polled had that as a base case for this month’s decision and only four of 18 respondents said that it was a likely decision this year.
Policymaker Michael Saunders, who voted for a 50 basis point raise last month, said earlier in March he wouldn’t necessarily vote the same way again.
“Following recent comments from MPC members, we believe a 50 basis point hike is highly unlikely,” noted Goldman Sachs economists.
Inflation is expected to peak at 7.7% in the next quarter, almost four times the Bank’s 2% target and a marked improvement from the median of 6.6% announced last month. It is expected to slow in subsequent quarters, but won’t reach the target until late 2023, according to the poll.
And 15 out of 18 economists said they were likely or very likely to raise their medium-term inflation forecasts in the coming months. Only three said it was unlikely.
Annual rates have also been lowered, with growth now pegged at 3.9% this year and 1.7% next year, down from 4.3% and 2.1%.
“The worsening cost of living crisis should ultimately weigh on activity – particularly private consumption over the coming quarters,” said Deutsche Bank’s Sanjay Raja.
“Consumer confidence is already weakening, and we expect that to translate into weaker GDP data as the year progresses.”
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