Bank of England seen to lift Bank Rate by 25ps to 4.25% in March, then pause
LONDON – The Bank of England will make its final increase to borrowing costs in the current cycle next month to combat double-digit inflation, according to a Reuters poll which showed the British economy is almost certainly entering a recession.
One of the first major central banks to begin lifting interest rates after the worst of the COVID pandemic, the BoE has already added 390 basis points to the Bank Rate. The Feb. 9-13 poll showed it would deliver another 25-basis-point hike on March 23, taking the rate to 4.25 percent.
“Our baseline case is that the MPC (Monetary Policy Committee) will increase the Bank Rate by a further 25 bps to 4.25 percent next month as an insurance policy against firmer inflation pressures stemming from the tight labour market,” said Philip Shaw, chief economist at Investec.
The U.S. Federal Reserve and the European Central Bank are also close to winding down their policy tightening campaigns, but are a little further from the end than the BoE, separate Reuters polls found.
The March median view for the BoE was held by around three-quarters of 49 respondents, 38, while eight said it was already done. Only three expected a more aggressive 50-basis-point move.
Still, when asked about the risk to their terminal rate forecast, 11 of 15 respondents said it was that the Bank Rate ends higher than they expect.
MPC member Jonathan Haskel said on Monday the BoE needed to be “really, really careful” about the risk of high inflation becoming embedded after saying last week he remained ready to “act forcefully” against persistent inflation.
However, fellow MPC member Silvana Tenreyro – who voted against half-percentage-point hikes earlier this month and in December – said interest rates were already too high and she might consider voting for a cut in future meetings.
Poll medians did not show a BoE cut until at least April 2024.
Inflation eased in December to a 10.5 percent annual rate, but January’s reading, due on Wednesday, is expected to show it was still over five times the Bank’s 2 percent target at 10.3 percent.
It will drift down but won’t be at or under that goal until the second quarter of next year, the poll showed. Inflation was expected to average 7 percent this year and 2.6 percent next.
Alongside elevated borrowing costs, consumers are struggling with high energy and food costs. Nearly two-thirds of respondents to an additional question said it would be at least six months before the cost-of-living crisis eased significantly.
Recession
The BoE has had to raise interest rates even though the economy has struggled after a post-pandemic boost faltered amid the cost-of-living crisis. It narrowly avoided recession last quarter as it flatlined.
The economy will contract 0.4 percent in each of the first and second quarters and then shrink 0.1 percent in the following one, exceeding the technical definition of recession, medians in the poll showed. It is forecast to eke out 0.1 percent growth in the October-December period.
“We do still think that the impact of the real income squeeze, ‘bad inflation’ – food, energy and rents/mortgages – and the 390 bps of monetary tightening we have had in just over a year, will weigh on growth in H1 (first half of) 2023,” said Elizabeth Martins, an economist at HSBC.
The economy will end this year 0.8 percent smaller than it started 2023, the poll showed, and then expand 0.8 percent next year.
That is a bigger contraction than the 0.6 percent predicted by the International Monetary Fund last month when it said Britain was the only Group of Seven nation expected to shrink this year.
Finance Minister Jeremy Hunt is due to announce measures he hopes will speed up growth in a budget statement on March 15.
