Bank of England expected to raise interest rates to 15-year high to fight inflation

The Bank of England is expected to raise interest rates to a 15-year high of 5.25 per cent from 5 per cent on Thursday, though there is a risk of a repeat of June’s surprise half-point increase as inflation remains the highest of the world’s major economies.

The European Central Bank and the US Federal Reserve increased rates by a quarter of a percentage point last week but unlike the Bank of England (BoE) markets think they are at or near the end of their rate-tightening cycle.

Bets on how high the BoE will go have swung in recent weeks as investors try to work out if Britain has a uniquely deep-rooted inflation problem.

Market expectations for peak bank rate reached 6.5 per cent on July 11th after data showed record wage growth before falling back to 5.75 per cent after a sharp decline in consumer price inflation.

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But at 7.9 per cent in June, annual price growth is nearly four times the BoE’s 2 per cent target and more than double the US rate.

Prime minister Rishi Sunak pledged in January to halve inflation this year, a goal which now looks challenging.

Mortgage costs have hit their highest since 2008, weighing on house-building. A survey last week showed private-sector growth across the economy fell to a six-month low in July.

Investors see a two-in-three chance of the BoE raising Bank Rate to 5.25 per cent on Thursday but for most economists polled by Reuters the BoE’s decision is finely balanced.

ING economist James Smith said the BoE was “doing a bit of soul-searching” after missing last year’s inflation surge.

“That’s partly why all the central banks are erring on the side of over-tightening rather than under, because they don’t want to be the ones remembered for inflation staying high on their watch,” Mr Smith said.

The BoE began raising rates in December 2021, before other major central banks. A hike on Thursday would be its 14th in a row.

Governor Andrew Bailey has said it is “crucial we see the job through”. Deputy governor Dave Ramsden said even after recent falls, inflation remained “much too high” and there had not been much softening in longer-term pressures.

The picture from Britain’s job market is mixed. Wage growth excluding bonuses held at an annual rate of 7.3 per cent in the three months to May, the joint highest since records began in 2001. However, unemployment rose unexpectedly to a 16-month high of 4 per cent, and employers advertised fewer job vacancies. – Reuters