The Bank of England is likely to raise interest rates by 0.25% to 5.25% when the monetary policy committee meets on Thursday.
If the MPC goes ahead with the rate rise, which is widely expected by markets and forecast by analysts, this will be the 14th consecutive increase and record high since the 2007/08 financial crisis. It may also prompt another round of mortgage rate rises.
There is an outside chance the BoE may still go ahead with yet another 50bps rise. Central banks world over continue to grapple with rising inflation and last week both the Federal Reserve in the US and the European Central Bank opted for hikes.
The US Federal Reserve raised rates to 5.5%, highest since 2001, while the ECB lifted rates to 4.25%, both opting for 25bps rise.
The International Monetary Fund last week raised its outlook for global economic growth for this year but warned that higher inflation could still require more interest rate hikes and cut into that growth. It forecasts UK GDP to rise by 0.4%, up from its previous forecast of -0.3%, in 2023 and by 1% in 2024, indicating the economy will avoid recession.
But the gloom is not over as the BoE, stung by criticism of getting its inflation call wrong, is likely to continue with its strategy of curbing spending.
However, with the UK inflation rate dropping to a 15-month low of 7.9% and millions of households facing steep rises in mortgage costs the Bank is most likely to take a conventional approach of steady rises.
“It’s a close call, but we now think the MPC will settle for a 25bps hike, lifting Bank Rate to 5.25%,” analysts at Deutsche Bank said.
“We see two further quarter point rate hikes on the table, with Bank Rate peaking at 5.75%. Rate cuts, we think, will commence from Q2-24. But risks are skewed to a later and more shallow easing cycle.”
In June, the MPC voted seven to two for a 50bps rise with notably both Governor Andrew Bailey and chief economist Huw Pill voting in favour. Both have also consistently warned over the tough decisions needed to control rampant inflation.
Central banks use interest rates as one of their primary tools to influence economic conditions. By raising interest rates, they aim to slow down economic activity and reduce inflationary pressures. Similarly, central banks may lower interest rates to stimulate borrowing, spending, and investment as they did during the COVID pandemic.