Markets expect the Bank of England to reveal the biggest hike in interest rates in more than three decades when its decision-makers gather for a delayed meeting.
The Monetary Policy Committee (MPC) is expected to increase rates by 0.75 per cent to 2.5%.
This would be the UK’s highest interest rate since the financial crisis. The base rate was reduced from 3% to 2% in December 2008.
This would also be the single largest increase in interest rates since 1989.
Bank of England meeting next week important
“Investors think the most likely outcome is that the MPC will increase the bank rate by 75bp (0.75 percentage points) on Thursday,” said Samuel Tombs, UK chief economist at Pantheon Macroeconomics.
But he said economists are expecting a smaller increase to 2.25% – a 0.5 percentage point change similar to the bank’s previous hikes.
“For a start, hawkish surprises from the MPC are much less common than they were last year,” he said.
“Also, Governor Bailey openly mentioned a 50bp hike ahead of the August meeting, but did not give the markets a push for prices in a 75bp hike.
“We think the MPC will still consider an increase of 50bp to be in line with its pledge to act ‘forcefully’ if it sees signs of more persistent inflationary pressures.”
ING economist James Smith said the Bank of England would have to react to the recent fall in the price of the pound. Sterling hit a new 37-year low against the dollar on Friday.
“The Bank of England meeting next week is important,” he said.
“This will not only tell us how concerned policymakers are about the decline in sterling and other UK markets, but also how the government’s decision to limit domestic/commercial energy prices will translate into monetary policy.”
“We support a 50bp hike to take the bank rate to 2.25% on Thursday, although 75bp is clearly on the table and we would expect at least some policymakers to vote for it.”
He said rates are likely to rise again in November and December, reaching 3% by the end of the year.
To keep inflation under control, it has been decided to increase the interest rates. It is the best tool the Bank of England has to control inflation – currently at 9.9% – back to its 2% target.
But the decisions will also have a major impact on people’s finances, not least those with mortgages, who will have to start paying more for their home loans.
The MPC was originally set to announce its decision on Thursday 15 September, but it was delayed by a week due to the death of the Queen.
Credit: www.standard.co.uk /