BoE raises interest rates by 0.25 percentage points


The Bank of England could slow the pace of interest rate rises when it announces its latest decision on Thursday, but investors expect the central bank to continue tightening monetary policy for longer than either the European Central Bank or the US Federal Reserve.

After UK inflation fell more than expected in June, traders think the BoE’s Monetary Policy Committee is more likely to raise interest rates by 0.25 percentage points than deliver another 0.5 percentage point increase.

But in contrast with the US and eurozone — where hopes are rising that interest rates are close to a peak — financial markets are still pricing in a further two 0.25 percentage point rate increases by the BoE by the end of the year.

Of 62 economists polled by Reuters, 42 expect a 0.25 percentage point rate rise by the BoE on Thursday, with the remainder anticipating a 0.5 percentage point increase.

The BoE’s benchmark rate currently stands at 5 per cent, after the MPC announced a surprise 0.5 percentage point rise in May in response to persistently 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 has set a goal of halving inflation by the end of 2023, told LBC radio it was not falling as fast as he would like, but added Britons “can see light at the end of the tunnel”.

The latest official data showed consumer prices rose 7.9 per cent in the year to June, down from 10.1 per cent at the start of the year.

People appear to be gaining confidence that inflation will slow in the coming months. A survey published by Citi on Wednesday showed public expectations for inflation in 12 months’ time had fallen from 5 per cent in June to 4.3 per cent in July — a finding that points to a potential easing of workers’ demands for higher wages amid the cost of living crisis.

Michael Saunders, a former MPC member now advising the consultancy Oxford Economics, said the impact of higher interest rates on households had been “slower and smaller” than in the past because fixed rate mortgages were more common, homeowners had larger savings and fewer had a property loan.

But the economy would still face a “powerful delayed monetary tightening” as fixed rate mortgages expired, so the BoE would be “reluctant to hike rates much further”, he added.

Analysts do not expect the BoE to give any new steer on the likely path of interest rates at future MPC meetings, but to stick instead to its existing guidance that it will continue tightening policy if there is evidence of “more persistent” inflationary pressures.

The BoE could, however, set out plans to quicken the pace at which it reduces the bond holdings accumulated under quantitative easing programmes, from its current £80bn a year run-rate.

Dave Ramsden, BoE deputy governor for markets and banking, suggested last month this could be done without stepping up bond sales, since more assets are set to mature next year than in 2023. But some analysts think a small increase in bond sales is also possible.

Additional reporting by Tommy Stubbington in London

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