The Bank of England is expected to raise interest rates again this week, potentially as the final gasp of one of the major tightening cycles of the previous century, as a weakening economy worries officials.
All but one of the 65 economists polled by Reuters recently projected that the Bank of England will raise interest rates to 5.5% from 5.25% on Thursday, the highest level since 2007.
Financial markets are less convinced than economists, with rate futures suggesting a 25% likelihood of a halt on Friday, but both are coming to the conclusion that the run of rising borrowing prices since December 2021 is coming to an end.
If Bank Rate does peak at 5.5% – from a starting point of 0.1% – it would rank fourth on the list of Britain’s biggest tightening cycles of the last century, behind surges that took place in the late 1980s and in the early- and late-1970s.
Recession accompanied all of those prior sharp increases in rates – and a downturn is increasingly on the minds of the Monetary Policy Committee (MPC), with the 14 rate hikes it has already made yet to fully feed through into the real economy.
Much of the data over the last week underlined Governor Andrew Bailey’s comment this month that the BoE was “much nearer” to ending its tightening cycle.
Economic output in July dropped more steeply than expected, even if one-off factors like strikes were behind some of the fall, and the unemployment rate has already overshot the BoE’s forecast for the third quarter as a whole.
The European Central Bank also cited a weak economic outlook when it hiked rates last week and signalled that would be its last such move in the current cycle.
But with inflation in Britain still running higher than in any other major advanced economy, the calculation for BoE officials is arguably more complex – with hot wage growth data in Britain still pointing to inflationary risks.
“While we expect the critical mass of the committee to be grouped around a 25 basis-point hike, the uncertain, finely balanced nature of the turning point in the cycle means we believe there will be dissenters on both sides,” said Jack Meaning, chief UK economist of Barclays.
Data between now and Thursday’s announcement could yet change the debate.
Inflation figures for August due on Wednesday are likely to buck the falling trend thanks to rising petrol prices.
Investors will be wary of the BoE’s tendency under Bailey to react strongly to above-forecast inflation prints – an approach that some economists say has undermined its ability to deliver a consistent message and control market rates.
As ever, the language employed by the MPC on the path ahead, and shifts the balance of opinion, could have a big market impact.
Benjamin Nabarro, chief UK economist at Citi, said a speech last week from the MPC’s most hawkish member Catherine Mann – in which she warned against a pause for interest rates – might offer an early clue.
“Mann’s explicit pushback against a pause, and linked rebuke of majority MPC judgements is, we think a sign of an internal discussion that is moving against her. A pause therefore is, we think, part of the discussion.”