DAccording to economists, the Bank of England will decide to raise interest rates by 0.25 percentage points to 5.5 percent at its meeting on Thursday. A 15th rate hike to fight inflation seems a done deal according to most analysts, although some members of the Bank of England’s MPC monetary policy committee have sent mixed signals. Chief Economist Huw Bill signaled his desire to take a break from interest rates. BoE Governor Andrew Bailey and his deputy Joan Cunliffe recently told a parliamentary hearing that key interest rate hikes are very close to the top of the cycle. India-born economist Swati Dhingra is an external MPC member. He said the key interest rate was already set too high.
On the other hand, the majority of monetary policymakers feel that at least one interest rate hike is necessary to combat the continued high inflation in the kingdom. The inflation rate was 6.8 per cent in July and surprisingly eased slightly to 6.7 per cent in August despite higher fuel prices, the ONS statistics office said on Wednesday. Thus the interest rate hike is again in question. The decision is now on a knife edge,” Berenberg economist Callum Pickering said on Wednesday.
The central bank is particularly concerned about the steep rise in prices for services. Wage growth in the private sector increased to 8.1 percent in July, above the rate of inflation.
Will there be an end to interest rate hikes after that?
An interest rate hike to 5.5 percent will be approved by a wide majority of eight votes to one on Thursday, according to Sanjay Raja, an economist at Deutsche Bank in London. However, he acknowledges that dissenting voices in the MPC are certainly a risk to this forecast.
Uncredit also expects interest rates to rise by 0.25 basis points in London this week. While the US Federal Reserve will not raise interest rates this Wednesday, the Bank of England, the Swedish Riksbank and the Norwegian Central Bank will each increase by a quarter of a percentage point on Thursday, writes UniCredit. Whether interest rate hikes will end in London after this is highly controversial. Some economists lean towards this view.
In addition to the interest rate decision, the BoE will vote on Thursday on whether to further reduce its bond holdings in the coming year. By mid-2023, the central bank still held 800 billion pounds of bonds. It now sets a rate known as quantitative tightening (QT), the opposite of quantitative easing, for the coming year. It is reducing its bond holdings by £80bn this year, with £34bn of sales and £46bn worth of securities maturing. The central bank may accelerate the pace of tapering in 2024. Lieutenant Governor Dave Ramsay has called for more than £80 billion next year. Sanjay, an economist at Deutsche Bank, predicts QT volume to increase to 90 to 100 billion pounds. The central bank’s higher sales lower bond prices and – as intended – raise interest rates. Due to selling at low prices, the government incurs heavy losses.
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