Borrowing costs

Turmoil may persuade Bank to pause rate rises

Bank of England
The Bank of England will decide on interest rates next Thursday (pic: Terry Murden)

Concern over the global banking sector could see the Bank of England hold back from raising interest rates next week, according to a number of market watchers.

While a further hike remains on the table, investors have turned more doubtful about the BoE’s appetite for more rises amid mounting fragility of the banks in the US and Europe which has prompted turmoil on stock markets.

The BoE indicated last month that a pause in the consecutive run of 10 consecutive rate increases was now on the agenda.

Interest rate futures today showed traders were putting a roughly 50-50 chance on the BoE maintaining Bank Rate at 4% next week. A week ago a pause was given only a 10% chance.

Since then, US lender Silicon Valley Bank and Signature Bank have collapsed, and a plunge in Credit Suisse’s shares forced the Swiss central bank to inject 50 billion francs of liquidity. Yesterday in the US a number of big US banks pumped funds into First Republic Bank.

Despite the nervousness in the US, a half-point rise is still being pencilled in when the Federal Reserve meets a day before the BoE.

Should the BoE opt for an 11th hike, there is expectation that it would be a 25 basis-point rise, taking the Bank Rate to 4.25%. Most economists believe that it would remain at this rate for the rest of this year as the bank allows the lag effect to begin eroding inflation.

The Office for Budget Responsibility expects inflation to tumble to 2.9% by the end of this year, still above the BoE’s target of 2%, but considerably more manageable than the double digit rates of the past few months.

Analysts at RBC Capital Markets believe the BoE will raise rates one more time next week as it may remain emboldened to stick to the key task of beating inflation after the European Central Bank defied the turmoil to push up its key rates by half a percentage point on Thursday.

Laith Khalaf, head of investment analysis at AJ Bell, said: “There’s been a big shift in monetary policy expectations, which suggests we are now pretty close to the top of the interest rate cycle in the UK. Markets are currently pricing in a ‘one and done’ hike for the Bank of England, with a peak of 4.25% for the UK’s base rate.”

But economists at Investec said a pause by the BoE “seems to be the most likely outturn”, although that does not necessarily imply that tightening has finished, they said in a note to clients.

Martin Beck, chief economic adviser to the EY ITEM Club, is also expecting no increase next week.

“For over a year, speculation around monetary policy has centred on how much the Monetary Policy Committee (MPC) would raise Bank Rate at its next meeting. But the focus has now moved to whether rates will rise at all,” he said.

“The EY ITEM Club thinks there’s a good chance they will not, due to the financial and economic risks stemming from well-publicised issues in the US banking sector and positive domestic inflationary developments.

“Even before recent banking sector developments, the MPC had given no clear indication that a rate rise was due this month. On the one hand, at least one member has signalled that they think further tightening is needed, reflecting concerns about above-target inflation becoming persistent.

“On the other, one of the two members who voted to keep rates on hold in February has been clear that they think rate rises may have gone too far, given falling energy prices and the fact that the economic effect of past policy tightening has yet to come through in full. “

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