The Bank of England (BoE) is set to make a rate decision on Thursday, with markets anticipating an increase from 5% to 5.25%. However, there is a possibility of a larger rate hike, similar to the surprise half-point increase seen in June, due to the persistently high inflation rate.
Inflation in the UK fell to 7.9% in June, although it remains the highest among the G7 countries. This high inflation rate has raised concerns among policymakers, prompting speculation of a more substantial rate increase. Governor Bailey will address the decision in a news conference following the announcement.
While the US Federal Reserve and the European Central Bank have recently raised rates, the BoE is expected to continue its path of tightening monetary policy. However, there is uncertainty surrounding the extent to which rates will increase as investors assess the depth of the inflation problem in the UK.
Market expectations for the peak Bank Rate reached 6.5% on July 11 but have since fallen to 5.75%. This indicates a shift in investor sentiment regarding the potential severity of rate hikes. The annual price growth in the UK is nearly four times the BoE’s 2% target and more than double the US rate, posing a challenge to Prime Minister Rishi Sunak’s goal of halving inflation this year.
The impact of rising rates can already be seen in mortgage costs, which have reached their highest level since 2008, impacting the construction of new homes. Furthermore, a survey revealed that private-sector growth in the UK fell to a six-month low in July, indicating potential headwinds for the economy.
Investors predict a two-in-three chance of a rate increase to 5.25% on Thursday, but economists are divided on the BoE’s decision. BoE Governor Andrew Bailey and Deputy Governor Dave Ramsden have emphasized the need to address high inflation. However, some members of the Monetary Policy Committee (MPC) may vote for a pause in rate hikes, considering weak producer price inflation.
Critics of the BoE argue that higher rates could lead to an unnecessary economic downturn and are not an effective tool to tackle inflation caused by food and energy prices. Meanwhile, the BoE is expected to revise its growth and inflation forecasts due to the higher market interest rate expectations.
The International Monetary Fund (IMF) forecasts that the UK’s economy will grow by only 0.4% this year, making it the second slowest among the G7 countries. Given these circumstances, the BoE’s forward guidance is expected to be vague in order to keep all options open.
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