The Bank of England will raise its Bank Rate by a quarter-point to 5.25% on August 3, making borrowing the costliest since early 2008, and hike twice more by the year-end as price pressures persist, a Reuters poll showed.
Despite 13 rate rises since December 2021, the BoE is grappling with higher inflation than its peers at nearly four times the 2% target. Economists are more hawkish than they were a few weeks ago and are nearly evenly split on forecasting a final quarter-point move to 5.75%.
Criticised in recent months by investors for a lack of clarity in its communication, the BoE hiked its Bank Rate (GBBOEI=ECI), Britain’s single most important interest rate, by a surprise 50 basis points in June to 5.00%, leading markets to quickly price in a 6.50% terminal rate.
But inflation fell more than expected last month, to 7.9% from 8.7% in May, prompting traders to scale back rate rise bets, leaving economists and markets broadly aligned on a smaller move in August and 5.75% as a peak rate.
Nearly 70% of economists, 42 of 62, expect the BoE to raise Bank Rate by 25 basis points on Aug. 3 to 5.25%, while just 20 predicted a half point rise, the July 19-24 poll showed.
“The BoE has more work to do but the inflation surprise bolsters confidence that it returns to a 25 bps pace of tightening in August,” Bruce Kasman from J.P. Morgan said.
“The slide in core goods prices is likely to be sustained, but services price inflation remains extraordinarily elevated alongside wage growth running above 7%.”
Among 14 gilt-edged market makers who participated in the survey, 11 expected the BoE to add at least 75 basis points to Bank Rate by year-end with two of those saying 100 basis points.
Most participants in the wider survey predicted a quarter point rise in September following an August rise, but analysts were divided about whether there would be another 25 basis point hike in the fourth quarter.
While the median peak rate forecast was 5.75%, nearly half of respondents, 29 of 61, still said 5.50%, the same as a June 26 poll. As recently as a June 14 poll, the consensus was for Bank Rate to peak at 5.00%.
Predictions for Bank Rate at year-end were in a wide range. Six economists forecast 6.00%, 25 said 5.75%, 29 said 5.50% and one put it at 5.25%.
The British economy was expected to grow 0.2% this year before expanding 0.7% in 2024, the poll found. A handful of economists predicted a recession would start by year-end.
Inflation was predicted to fall steadily, averaging 7.4% this year, 2.9% in 2024 and 2.0% in 2025.
Asked where core inflation will be at year-end, nearly two thirds of respondents, 14 of 22, said slightly lower. The remaining eight said significantly lower.
Wage inflation will be the most stubborn driver of core inflation over the coming months, according to 17 of 18 respondents to an additional question.
“Company efforts to protect margins are a possible catalyst for inflation, but so are workers’ efforts to demand higher wages, offset the losses in real income and restore the distributional balance between wages and profits,” said Stefan Koopman, market economist at Rabobank.
–Reuters
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