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The Bank of England is expected to announce its latest decision on interest rates on Thursday, with speculation that it may slow the pace of rate hikes. However, compared to the European Central Bank and the US Federal Reserve, investors anticipate that the central bank will continue tightening monetary policy for a longer period of time.
Traders believe that, following a larger-than-expected decline in UK inflation in June, the BoE’s Monetary Policy Committee is more likely to raise interest rates by 0.25 percentage points rather than implementing another 0.5 percentage point increase.
While hopes are rising in the US and eurozone that interest rates are nearing their peak, financial markets still price in two more 0.25 percentage point rate increases by the BoE by the end of the year.
According to a Reuters poll of 62 economists, 42 expect a 0.25 percentage point rate rise by the BoE on Thursday, while the remaining economists anticipate a 0.5 percentage point increase.
The BoE’s benchmark rate currently stands at 5%, after a surprise 0.5 percentage point rise in May due to persistent high inflation.
“There has been some relief that inflation hasn’t gotten worse, but there is still a lot of progress that needs to be made,” said Kim Crawford, global rates portfolio manager at JPMorgan Asset Management.
UK Prime Minister Rishi Sunak, who aims to halve inflation by the end of 2023, acknowledged that inflation is not falling as quickly as desired but stated that Britons can see light at the end of the tunnel.
The latest official data shows that consumer prices rose by 7.9% in the year to June, down from 10.1% at the beginning of the year.
A survey conducted by Citi revealed that public expectations for inflation in 12 months’ time have fallen from 5% in June to 4.3% in July, suggesting a potential easing of workers’ demands for higher wages in light of the cost of living crisis.
Michael Saunders, a former MPC member now advising Oxford Economics, noted that the impact of higher interest rates on households has been slower and smaller due to the prevalence of fixed-rate mortgages, larger savings among homeowners, and fewer property loans.
However, Saunders also cautioned that the economy could face a “powerful delayed monetary tightening” when fixed-rate mortgages expire, leading the BoE to be cautious about further rate hikes.
Analysts do not expect the BoE to provide any new guidance on the future path of interest rates at future MPC meetings, but rather to adhere to its current guidance of tightening policy in response to “more persistent” inflationary pressures.
The BoE might outline plans to accelerate the reduction of bond holdings from its current £80bn a year run-rate under quantitative easing programs. Dave Ramsden, BoE deputy governor for markets and banking, suggested that this could be achieved without increasing bond sales, as more assets are set to mature next year than in 2023. However, some analysts believe a small increase in bond sales is also possible.
Additional reporting by Tommy Stubbington in London
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