Policy tightening

Bank of England poised to hike interest rate to 0.5%

Bank of England
Bank of England policy makers will announce their decision on Thursday (pic: Terry Murden)

Market analysts believe the Bank of England will kick off the first in a series of interest rate rises next week.

The Bank’s monetary policy committee will make an announcement on Thursday following its two-day meeting, with expectations that the rate will rise from 0.25% to 0.5% in order to tame inflation.

An easing of tension over the impact of the Omiron variant on the economy, and the withdrawal of furlough support on the labour market, has led to a belief that after a short slowdown in December and January economic activity will pick up in the spring.

Luke Bartholomew, senior economist at abrdn, said: “We are expecting the Bank of England to hike rates by 25bps next week, and start the process of passively reducing the size of its balance sheet.

“While Omicron is likely to have taken a dent out of economic activity in December and January, we expect this to be relatively small in the context of past lockdowns and therefore, that the economy should recover relatively quickly from here.

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“Meanwhile, the labour market seems to have weathered the end of furlough better than even the more optimistic forecasts. As such, the Bank is free to focus on inflation, which is clearly a growing concern for all policy makers.

“While there is little the Bank can do about the short term inflationary pressures brought on by rising energy prices  and supply chain issues, tightening monetary policy should help to keep inflation expectations anchored and prevent higher inflation becoming more deeply embedded in price setting behaviour.

“This means that rates are likely to increase several more times this year as the Bank signals its inflation fighting intent even in the face of a squeeze on household incomes this year.”

Martin Beck, chief economic adviser to the EY ITEM Club, said: “While the case for the MPC raising interest rates in February’s meeting is far from unambiguous, the EY ITEM Club expects the committee to increase Bank Rate to 0.5% in the February meeting on Thursday.

“Granted, the Omicron variant has almost certainly left the economy weakened as a result of greater consumer hesitancy and a rise in the number of people isolating.

“Measures of mobility and social spending were soft through December, and retail sales saw an unexpectedly significant 3.7% month-on-month (m/m) fall. GDP is also likely to have fallen in the final month of 2021.

COVID-19 infections peaked at the start of the January and have been on a declining trend since. All ‘Plan B’ social distancing restrictions in England were lifted on 27 January. What’s more, the impact of the Omicron variant on the UK economy looks to have been modest.

“High-frequency data suggest consumer activity is recovering and the jobs market has tightened. Unemployment fell to 4.1% in September to November, and the ratio of unemployed to vacancies reached a record low.”

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