The Bank of England is expected to raise interest rate from 1 to 1.25 per cent, its steepest rate hikes in 25 years, and is likely to keep going in the coming months as inflation heads for double digits. Investors and most economists are predicting a quarter-point rate hike by the BoE this week.
While historically low, expectations for British borrowing costs over the next couple of years have risen sharply recently and they jumped again this week when the European Central Bank flagged rate hikes at its next two meetings, including a possible half percentage-point rise in September.
Investors are betting on the BoE's Monetary Policy Committee doubling Bank Rate to 2% by September and hitting 3% by March next year. Some economists are ramping up their forecasts too.
Sanjay Raja at Deutsche Bank said he now expected rates to peak at 2.5%, up from a previous call of 1.75%, starting with a 0.25% increase next week.
"We don't expect a unanimous decision, however. Instead, risks are skewed to a more split MPC, with at least three members on the committee looking for a bigger 50 basis-point move," he said. "There's also a possibility of an even messier vote, with one or two members looking for no change to the Bank Rate."
The BoE was the first big central bank to start reversing its pandemic stimulus in December, before the US Federal Reserve and others began to move to head off the jump in inflation caused by the reopening of the world economy after the coronavirus pandemic and then Russia's invasion of Ukraine.
But that did not stop British inflation hitting a 4-year high of 9% in April, almost five times the BoE's 2% target. The BoE thinks inflation is set to surpass 10% later in 2022, when regulated energy tariffs are due to jump by a further 40%, and consumers have already reined in their spending while there are signs of a slowdown in the housing market.
