Interest rates set to rise to 4% as Bank prepares for ‘shallow’ recession
The Bank of England is expected to push interest rates higher on Thursday for the 10th time in a row.
But some experts think the Bank is heading towards the end of its cycle of rate hikes, bringing some potential relief to strained borrowers.
Markets expect the Bank’s monetary policy committee (MPC) to raise interest rates to 4% on Thursday, from the current rate of 3.5%.
It is likely to be a split vote, with some members of the nine-person MPC opting for a smaller hike to 3.75%, or no increase at all.
But the tide could be set to turn imminently, with some economists suggesting the decision will mark the penultimate base rate rise.
Interest rates could peak at 4.5% or 4.25% next month, before coming back down.
The decision comes after Bank governor Andrew Bailey provided some optimism for the future of the UK economy as he insisted the country has turned a corner on rising inflation.
He said earlier this month that while Britain still faces a recession, it could be “shallower” than previously expected, indicating a less severe downturn.
On Tuesday, the International Monetary Fund (IMF) predicted the UK will be the only major economy to plunge into recession this year, with the economy set to contract by 0.3%.
Chancellor Jeremy Hunt acknowledged the grim forecast but insisted the UK’s long-term prospects for growth are more promising.
It means the Bank could upgrade its outlook for the economy on Thursday from the current forecast of a recession lasting eight quarters – which would be the longest since reliable records began in the 1920s.
The length and extent of the contraction could be shortened in the Bank’s estimations.
The Bank has been raising rates successively for more than a year. In December 2021 the base rate stood at just 0.1% as policymakers tried to encourage consumer spending after Covid slowed the economy.
Efforts to control inflation and bring it back down to the Bank’s 2% target has led the Bank to tighten monetary policy since then.
However, the UK’s consumer prices index (CPI) inflation rate slipped slightly to 10.5% in December, down from 10.7% in November and 11.1% in October, suggesting the measure has now passed its peak.
Deutsche Bank suggested Thursday would mark the MPC’s final “forceful” hike in the tightening cycle with a 0.5 percentage point increase.
Societe Generale Global Economics suggested the same, but said it expects another 0.5 percentage point hike in March before coming back down.
The SocGen economists said: “Even though the outlook is less gloomy than expected only three months ago, we still think a recession is likely and the MPC’s forecasts should continue to predict one for this year.
“This, and the mounting evidence of some cooling in the labour market, vacancies and job growth in particular, should lead the committee to contemplate an imminent end to tightening.”
Investec Economics, on the other hand, anticipates a smaller rate hike that will take it to 3.75% on Thursday, before peaking at 4% in March.
“Recent weeks have ushered in a greater sense of economic optimism,” Philip Shaw, chief economist at Investec, said.
“This has been driven partly by the mild European winter, which has helped to avoid a need for energy rationing, contributing to a substantial fall in current spot gas prices as well as gas price futures.
“In the UK, we are set for another year where real household disposable incomes are set to fall by about 3%, which will continue to squeeze spending and make a recession virtually unavoidable.”
AJ Bell analyst Laith Khalaf said a lot has changed since the last MPC meeting, including the fall in gas prices, which will make the committee “think twice about pushing rates up too much”.