The Bank of England is likely to shift the gear down on interest rate hikes this week as the economy enters a ‘prolonged’ recession and inflation is seen slowing towards the 2 percent target in two years’ time.
Markets have penciled in a 50 bps rate hike, after the central bank delivered a 75 bps increase in November, which was the biggest in 33 years.
The Monetary Policy Committee is set to conclude the rate-setting meeting on December 15. The nine-member committee is likely to decide on the rate hike again in a split vote.
For the last several months, 75 basis point hike was the norm for global central banks. However, this time around they are likely to opt for smaller increases in interest rates as the slowing economic activity across the world has kindled recession worries.
The US Federal Reserve, which has led the policy tightening league, delivered 75 basis points increase over last four straight meetings. The next move is due on December 14 when the FOMC Chair Jerome Powell is widely expected to announce a 50 basis point hike.
The European Central Bank has also resorted to a 75 basis points hike at the last two straight meetings. The central bank for the single currency bloc is set announce its next move on Thursday when the Governing Council led by ECB President Christine Lagarde is expected to raise interest rates by half a percentage point.
Elsewhere in Europe, the Swiss National Bank is expected to lift the benchmark rate by 50 basis point, also on Thursday, softening its pace from 75 basis points action at the previous quarterly meeting in September. This would mark the third consecutive increase.
In order to tame the stubbornly high UK inflation, the BoE has raised the bank rate over the last eight consecutive meetings, taking it to 3.00 percent, which is the highest since November 2008.
ONS is set to release the latest consumer price data on Wednesday, which is expected to show a slowdown in the annual inflation rate to 10.9 percent in November from a 41-year high of 11.1 percent in October. Excluding energy, food, alcoholic beverages and tobacco, core inflation is seen unchanged again at 6.5 percent in November.
In November, the BoE had projected UK inflation to peak at around 11 percent in the fourth quarter of this year. Thereafter, inflation is seen falling sharply to around 5 percent by the end of next year and to fall to 1.4 percent in two years’ time.
The BoE projected the UK to remain in recession throughout next year and the first half of 2024, and to recover only gradually thereafter. The challenging economic outlook might make the policymakers more dovish.
Chancellor Jeremy Hunt said on Monday that the economy will get worse before it gets better.
ING economists expect another 50 basis points move in February, which will likely mark the end of the tightening cycle.
“But with wage pressures unlikely to fully abate even if the jobs markets begin to weaken, we think the BoE will be less swift to cut rates than the US Federal Reserve,” ING said.
For now, the ING economists are pencilling in a first rate cut for the first few months of 2024.
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