Bank of America chief economist Robert Wood has projected a hike of 0.25 per cent in the Bank of England’s (BoE) next announcement on 21 September.
This will see the base rate increase from its current rate of 5.25 per cent, its highest point since 2008, to 5.5 per cent which means borrowers could face even higher mortgage repayments as they contend with rising bills and the cost-of-living crisis.
Wood attributes this to the UK’s “entrenched inflation problem”, so while the interest rate is unlikely to rise further, it will continue at the same level through the majority of 2024.
According to Investment Week, the economist said: “Further labour market easing will likely require weak demand rather than coming benignly from improving supply.
“We forecast the unemployment rate over the next year to rise at half the pace of the past year. How much spare capacity is needed and how much the BoE needs to hike to deliver that is extremely uncertain.
“Interest rates are, in our view, in restrictive territory now. The weak housing market testifies to that. It is not so much a question of the BoE catching up with policy anymore, but rather how restrictive rates need to be.
“That will depend on the mixture of shocks. The BoE suggest data surprises have been the result of structural changes that do not necessarily all suggest upside risks to inflation. The BoE will likely be cautious about hiking further.”
Fifteenth consecutive base rate rise predicted
This prediction adds further to the widespread belief that a fifteenth consecutive rise in base rate from the BoE is imminent, even though July saw a fall in the annual consumer prices index (CPI) inflation from 7.9 per cent to 6.8 per cent.
Reuters reports that a majority of economists believes that the base rate rise will not stop at 5.5 per cent and says financial markets “expect the base rate to peak at 5.75 per cent this year”.
Ahead of the Bank of England’s September announcement, research firm Capital Economics concurred with the Bank of America assessment that rates would not rise substantially, but would remain high for the foreseeable future.
Capital Economics UK economist Ashley Webb said: “This week the Bank of England’s chief economist, Huw Pill, said that he didn’t think interest rates will rise much further from 5.25 per cent now but that rates are likely to stay high for a long time.
“We’re expecting only one more 25 basis point rate hike, from 5.25 per cent to 5.50 per cent, in September before rates are put on hold until late in 2024. But the mild recession we forecast may mean rates are cut faster than investors (and Pill) expect in late 2024 and in 2025.”
