(CTN News) – In a recent Reuters poll, it was revealed that the Bank of England (BoE) plans to raise its Bank Rate by a quarter-point to 5.25% on August 3, making borrowing the costliest since early 2008.
Economists Divided on the Final Interest Rate Move for 2023
This decision comes amid soaring inflation rates, nearly four times higher than the Bank of England’s 2% target, despite already implementing 13 rate increases since December 2021. Economists are now forecasting two more rate hikes by the end of the year to combat persistent price pressures.
The Bank of England faced criticism for its unclear communication, but it surprised markets with a 50 basis points increase in June, leading to expectations of a 6.50% terminal rate.
However, inflation dropped more than anticipated in the past month, resulting in a scaling back of rate rise bets, aligning economists and markets on a smaller move in August with 5.75% as the peak rate.
Inflation Eases Slightly, but Challenges Remain for the Bank of England
Approximately 70% of economists in the poll expect a 25 basis point increase on August 3, while only 20 predicted a half point rise.
Despite the lower inflation figures, many believe the Bank of England will return to a 25 bps pace of tightening in August. Wage inflation remains a significant concern, with services price inflation remaining high and wage growth running above 7%.
Looking ahead, most participants predict a quarter point rise in September following the August hike. There is, however, uncertainty about another 25 basis point increase in the fourth quarter. The median peak rate forecast remains at 5.75%, but almost half of respondents still believe it could peak at 5.50%.
Forecasts for the Bank Rate at year-end span a wide range, with predictions ranging from 5.25% to 6.00%. The British economy is expected to grow by 0.2% this year and expand by 0.7% in 2024, though a handful of economists fear a possible recession by year-end.
Inflation projections show a steady decline, with an average of 7.4% this year, 2.9% in 2024, and 2.0% in 2025. Most respondents believe core inflation will be slightly lower by year-end, with wage inflation identified as the primary driver of core inflation in the coming months.
In summary, the Bank of England is gearing up for further interest rate hikes to combat surging inflation, but economic uncertainties and wage inflation dynamics present challenges in fine-tuning the monetary policy.
