Brits are braced for more pain today with the Bank of England expected to hike interest rates again.
Analysts are expecting the base rate to be pushed from 3.5 per cent to 4 per cent when the decision is announced at noon.
That would be the 10th successive increase and the highest level since 2008 – imposing more misery on mortgage-payers as the Bank struggles to contain rampant inflation.
However, there are hopes the cycle of tightening could be coming to an end, as the Monetary Policy Committee (MPC) tries to balance the slowing economy against the threat of spiralling prices.
Overnight the US Federal Reserve increased its rate by just 0.25 percentage points, although it signalled there is likely to be more to come.
Analysts are expecting the Bank of England to raise interest rates from 3.5 per cent to 4 per cent when the decision is announced at noon
Inflation dropped slightly in December after spiralling to a 40-year high in October
Bank governor Andrew Bailey provided some optimism earlier this month, suggesting the country’s inflation woes have turned a corner
The nine-strong MPC is predicted to be split, with some members favouring a smaller hike or no increase at all.
Speculation is mounting that rates could peak at 4.5 per cent or 4.25 per cent next month, before coming back down.
Bank governor Andrew Bailey provided some optimism earlier this month, suggesting the country’s inflation woes have turned a corner.
While Britain still faces a recession, he indicated 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 in recession this year, with the economy set to contract by 0.6 per cent.
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 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 per cent 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 per cent 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 per cent in December, down from 10.7 per cent in November and 11.1 per cent 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.’
Chancellor Jeremy Hunt has insisted tackling inflation is his top priority
The IMF is now forecasting that the UK’s GDP will contract by 0.6 per cent in 2023 – it was previously expected to grow by 0.3 per cent
Investec Economics, on the other hand, anticipates a smaller rate hike that will take it to 3.75 per cent on Thursday, before peaking at 4 per cent 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 per cent, 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’.
