The Bank of England is expected to increase interest rates to 3.5% or higher the next week, but officials are divided about how much tightening is necessary to combat dual-digit inflation as the industry enters a downturn.
The governor of the Bank of England, Andrew Bailey, stated last month that additional rate increases were probably inevitable, though fewer than the financial markets had anticipated prior to that meeting when they predicted rates would hit 5.25% by mid-2023.
Two officials who opposed the BoE’s three-quarter-point rate hike in November, its largest in more than 30 years, have cautioned that further tightening would bring on an unduly deep recession.
On December 15, the BoE is expected to hike rates by 1⁄2 a percentage point to 3.5%, with a 22% probability that they would rise to 3.75%, according to the financial markets.
British consumers’ price inflation, which increased from 4.2% a year earlier to 11.1% in October, the strongest reading since 1981 and much more than 5 times the BoE’s 2% objective, is the immediate worry of the central bank.
The BoE worries that labour shortages as well as other bottlenecks brought on by the COVID-19 outbreak and Brexit may make inflation difficult to decline, even though a large portion of the increase has been caused by higher oil prices as a result of Russia’s invasion of Ukraine.
Philip Shaw, an economist at Investec, said another 50-basis point hike is anticipated.
The BoE has stated quite clearly that inflation is just too high, he continued. It is worried about how competitive the labour market is. Furthermore, its estimates carry significant risks.
Bailey claimed that because of the electricity price shock, Britons must accept lower living standards; nevertheless, the nation is currently seeing a surge of industrial activity as trade unions fight to lessen the impact on their members.
Following market turmoil brought on by the short-lived government of Prime Minister Liz Truss and fresh expectations of more substantial government support for family energy bills, Shaw sees the 75-basis point rate increase in November as an anomaly.
However, HSBC analyst Liz Martins warned that another rate increase of 75 basis points might occur if official data on economic growth, inflation, and the labour market, which are due next week, are higher than anticipated.
The first four-way split vote was feasible since the MPC had a variety of opinions about how close the BoE rates were to reaching their peak.
A kind spin would acknowledge the bleak prospects and applaud the absence of groupthink. Martins wrote in a letter to clients that more pessimistic commentators would claim it raises more concerns about the BoE’s readiness and capacity to take significant action to solve the present inflation situation.
Catherine Mann, an MPC member who has consistently voted against larger rate increases this year, is nonetheless anxious about the public and commercial expectations for inflation well over the medium term, which are significantly higher than the BoE’s 2% target.
Seven members of the MPC favoured increasing rates to 3% last month, but Silvana Tenreyro and Swati Dhingra voted for a quarter-point increase to 2.5% and 2.75%, respectively.
Tenreyro has since argued that rates should remain unchanged to prevent inflation from falling substantially below goal over the medium term, whilst Dhingra has argued that a much larger hike would result in an unduly severe recession.
The BoE predicted on Nov. 3 that Britain had started a recession that would run through the end of the year and reduce output by 1.7%.
This estimate was higher than more recent projections, in part because of the high market rate estimates at the time the assumptions were produced.
By financial markets, BoE interest rates will peak at 4.75% by the mid of next year, HSBC believes that they will halt at 3.75% in February, while Investec expects that they will peak at 4%.