Sun, April 21, 2024

Bank of England to raise interest rates to 0.25%

Bank of England to raise interest rates to 0.25%

The latest news showed that the Bank of England will be the first major bank to raise interest rates in the post-pandemic cycle. However, according to economists polled by Reuters, the first hike will now come until early next year.

Like its peers, the Bank of England cut borrowing costs to a record low as the COVID-19 pandemic wreaked havoc on the global economy. However, above-target inflation is likely to tip the bank’s hand.

Bank of England Governor Andrew Bailey sent a signal that the bank was gearing up to raise interest on Sunday. Furthermore, the latest poll revealed a sharp turnaround in anticipations for when the first hike would come.

Medians in the October 13-20 poll said the bank rate would increase 15 basis points to 0.25% in February-March. Remarkably, around a fifth of respondents said the initial move would come on November 4, in line with market anticipations.

In September, the first hike was not anticipated until Q4 of next year. Meanwhile, when asked about the risks to their current forecasts, around 85% of respondents to an additional question said it was more likely the bank acted earlier rather than later than they anticipated.

Inflation will likely peak at 4.0% next quarter before dropping to 3.5%

The data showed that inflation slowed last month to 3.1%. However, it was still well above the bank’s 2.0% target. Analysts say that the drop was probably only a temporary respite for consumers as supply-side constraints, intensified by Brexit issues, look set to resume.

According to the latest poll, inflation will peak at 4.0% next quarter before dropping to 3.5%, 2.7%, and 2.2% in the following quarters, much higher than expected in September.

Capital Economics announced that for the next six months, the worsening product and labor shortages will put the brakes on the economic rebound. Meanwhile higher energy prices drive up CPI inflation.

Britain’s economy contracted 9.7% in 2020, its biggest decline in 300 years. However, as most restrictions are imposed to contain COVID-19 from spreading now lifted, growth has returned.

This quarter, GDP was likely to expand by 1.1% this quarter. Weaker than the 1.5% anticipated in last month’s poll. A shortage of heavy goods drivers has added to supply chain disruptions.

The median of 80 forecasts put 2021 growth at 6.8%, unchanged from September, and 5.0% next year. Descent from the earlier 5.5% forecast.

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