The Bank of England is set to unveil the biggest increase in interest rates for 33 years next week as the central bank continues its efforts to contain inflation.
The key Monetary Policy Committee (MPC) meeting comes amid warnings that spending cuts and tax hikes could lead to a deeper and more permanent slowdown under new prime minister Rishi Sunak.
Most economists are of the view that the MPC meeting on Thursday, November 3, is likely to raise interest rates by 0.75 per cent to 3%.
This would be the eighth consecutive jump in interest rates by the bank, but would represent the largest increase since 1989.
Earlier this month, markets predicted an interest rate hike could be up to a percentage point, but sentiment eased after the change of chancellor and prime minister and the Bank of England’s bond purchases lowered the cost of borrowing. Till it calmed down.
Markets have also been braced for big hikes globally, with the Bank of Canada raising its interest rate by 0.5 percentage points, well below the widely projected 0.75 percent increase.
Still, earlier this month, Bank of England Governor Andrew Bailey said it was likely the increase in interest rates could exceed the 0.5 percent increase seen at the last meeting to 2.25%.
He said on 15 October: “As things stand today, my best guess is that inflationary pressures will require a stronger response than we expected in August.”
Deutsche Bank analysts have said they expect the Bank of England to opt for a 0.75 percentage point increase with a split vote.
Experts at the firm said they expect the latest forecast from the Bank of England, which will also come out on Thursday, to show that “the economic outlook has worsened”.
He added: “Based on market pricing, the UK economy will likely fall into a deeper and more prolonged recession.”
The bank will also reaffirm its long-term inflation expectations, indicating that the cost of living will be much higher than the central bank’s 2% target next year.
James Smith, a developed market analyst at ING, also made a downbeat prediction for the bank’s latest economic outlook.
“The new set of forecasts, which are crucially based on market interest rate expectations, are likely to be disappointing – reflecting a deep recession in the medium term and falling below the inflation target,” he said.
“This should be read as a subtle indication that market pricing is inconsistent with achieving its inflation target.”
Credit: www.standard.co.uk /