Economists and financial markets are predicting the central bank will raise interest rates by 0.50% at the Monetary Policy Committee meeting next week. The rate increases are expected to continue into next year as the British economy faces its worst economic downturn and inflation in history.
As inflation hit a 40-year high in October, Andrew Bailey, Governor of the Bank of England (BoE), said that further rate increases will likely be necessary. The borrowing interest rate for Britons currently stands at 3% after raising by 75 basis points (bp) last month—the biggest rate hike in over 30 years. Financial analysts are expecting the BOE’s nine-member Monetary Policy Committee (MPC) to increase interest rates by 50bp to touch 3.5% at a meeting to be held on December 15th.
The central bank’s biggest concern is to combat consumer price inflation, which stands at 11.1% – the highest rate since 1981, up from 4.2% this time last year. The BoE has set an inflation target of 2% for 2023 that it means to achieve by quantitative tightening. Last week, the Confederation of British Industry (CBI) released a forecast saying that the economy will shrink by 0.4% going into next year. The business organisation also stated that inflation has peaked and will start to come down, but will remain at 3.9% by the end of 2023, higher than the BoE’s 2% target.
BoE points out that much of the inflation has been driven by the rise in energy prices following Russia’s invasion of Ukraine, who is the largest foreign supplier of oil and gas to Britain. The central bank also fears that the country will remain in a long-term recession due to pandemic-induced labour shortages and supply chain crisis slowing down economic growth. Governor Bailey has asked Britons to reduce their standard of living as a result of the financial and energy crisis that is affecting the country.
Swati Dhingra, a trade economist at the London School of Economics and member of the MPC, raised concerns that raising borrowing costs will have a harmful impact on the economy and households.
“You do see a much deeper and a longer recession with rates being much higher. That is what I think we should all be worried about. Are we going to end up lengthening and deepening the recession if the tightening continues at the pace it is?” said the MPC member.
At last month’s meeting, the Bank of England rate-setter voted for a 50bp increase, when the majority of MPC voted in favour of a 75bp increase. British Interest rates have gone up from close to zero percent to 3% in the span of one year, the highest since the onset of the 2008 financial crisis. The committee has indicated that more rate increases are expected in the coming months as the Rishi Sunak government fights Britain’s record-setting inflation.
“I didn’t think that I would hear about fuel poverty and child poverty in this country. I thought that was behind me, coming from India. But the fact that we’re hearing that today, it’s absolutely tragic,” added Dhingra.
BoE is warning investors to reduce their expectations of future interest rate rises as tighter monetary policy is leading to an eight-quarter recession, the worst economic downturn in a century. Last month the central bank revealed Britain has officially entered a recession that would last until mid-2024, shrinking growth economic output by 1.7%.
Financial markets believe that the rates will peak at 4.6%, while British banking giant HSBC expects the BoE to stop at 3.75% in February, Investec predicts a peak of 4% for next year.