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Experts predict next Thursday’s base rate rise – analysis

by: Paloma Kubiak
  • 28/10/2022
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Experts predict next Thursday’s base rate rise – analysis
A lot has happened in the month since the last interest rate decision by the Bank of England’s Monetary Policy Committee (MPC). Could we see the base rate rise to 3.25 per cent?

The last interest rate decision took place on 22 September where the base rate climbed from 1.75 per cent to 2.25 per cent as the MPC looked to curb the effects of the ongoing eyewatering inflation rate.

After just over a month which has seen the disastrous mini Budget; turmoil in the mortgage market; and the resignation and accession of Prime Ministers and Chancellors, the MPC will meet on Thursday 3 November to decide the base rate. And while there is absolutely no doubt in which direction the rate will go, the question is how high?

‘Interest rates are going up from here’

For Laith Khalaf, head of investment analysis at AJ Bell, since the reversal of the mini Budget, “the case for additional interest rate rises has diminished, as the Treasury is no longer pushing in the opposite direction to the Bank of England”.

Khalaf said: “Make no mistake, interest rates are going up from here, but the government’s climb down from the inflationary policies of Trussonomics means the Bank won’t have to slam down on the brakes quite as hard.

“The market is now pricing in a 0.75 per cent interest rate rise at the next meeting. The delay to the new Chancellor’s fiscal statement will probably encourage the Bank’s rate-setters to be cautious with their November interest rate hike, because they’ll still be missing a big part of the economic picture. The Bank can always then adjust monetary policy at the December meeting if needed, when the full scope of the government’s fiscal plans will be laid bare by the Autumn Statement.”

Sanjay Raja, senior economist at Deutsche Bank agrees with this assessment.

In the bank’s UK Economic Notes released today, he wrote: “Following the recent fiscal news, we now expect the BoE to opt for a slightly smaller hike in November.

“We see the MPC taking bank rate up by 75bps to 3 per cent – in line with our September view (prior to the mini Budget). The November decision won’t be unanimous, however. We expect a split vote, with seven members voting for a 75bps hike, and two members voting for a smaller 50bps hike.”

Base rate could rise 100bps to 3.25 per cent

For consultancy Capital Economics, its 50/50 whether the base rate will rise by 75bps or 100bps next week.

But it is being bold as, on balance, it expects the base rate to rise from the current 2.25 per cent to 3.25 per cent rather than another “hawkish 50bps rise”.

Ruth Gregory, senior UK economist, said the further strengthening in domestic inflationary pressures and exceptional tightness in the labour market suggests there is a strong case for the MPC to opt for an aggressive interest rate hike.

She said there are several convincing reasons for this with the first being that three members of the committee voted to raise rates by 75bps at the September meeting.

“Second, and most importantly, the data released since September appears to have met the Bank of England’s criteria of ‘more persistent inflationary pressures’ required for the MPC to respond ‘forcefully’.

 

Inflation and a weak pound

Gregory added that “the MPC may judge that the costs of not raising rates far enough soon enough are bigger than the costs of raising rates too far too soon and having to cut them again”.

And when looking at other moves by central banks, such as the ECB’s 75bps hike yesterday, this creates another incentive for the Bank to keep pace and prevent the pound from weakening further.

She concluded: “While a wide range of outcomes are possible at next week’s MPC meeting, we think the chances of a 100bps hikes are higher than the market and other forecasters appreciate. The financial markets have priced in a 64 per cent chance of a 75bps hike and a 36 per cent chance of a 100bps hike. That said, a 100bps hike is certainly not nailed on and it is perhaps very close to 50/50 on 75bps versus 100bps.”

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