Bank of England expected to hike the base rate sooner

The base rate is expected to rise sooner than previously predicted following a weakening in the economy and comments made by the Bank of England.

While the Bank chose to hold the base rate at 0.1% unanimously, two members voted to ease quantitative easing.

Economic growth expectations have been revised down from 2.9% to 2.1% in the third quarter of the year.

UK inflation, which jumped to 3.2% last month, is expected to exceed 4% by the final quarter of the year, driven by surging gas prices.

The Bank of England has a 2% inflation target and increasing the base rate is one method of curbing inflation.

Ruth Gregory, senior UK economist at Capital Economics, predicted the first rate rise to happen in early 2022 rather than 2023 as was previously thought.

She said: “Today’s Monetary Policy Committee (MPC) policy statement suggests that the Bank is moving closer to raising interest rates. As such, we now think that rates could rise in early 2022, rather than in 2023 as we had previously thought.

“A rate hike in November 2021 looks too soon, given that all members agreed that the outlook for the labour market was particularly uncertain and that there was a “high option value in waiting for additional information” about the impact on unemployment once the furlough scheme ends in late-September.

“That suggests most MPC members are willing to sit tight for a few months. In our view, a rate hike in February/May 2022 seems plausible given that, according to our forecasts, this is when inflation is likely to be at its highest, and when the upside risk to inflation expectations may be at their greatest.”

However Samuel Tombs, chief UK economist at Pantheon Macroeconomics, is unmoved on when the first base rate rise will happen.

He said: “We doubt… that the MPC will feel compelled to dampen economic activity by raising Bank Rate.

“The extra labour market slack unleashed by the ending of the furlough scheme should ensure that year-over-year growth in wages does not track CPI inflation higher over the next year.

“High inflation will be clearly attributable to energy prices and higher taxes, and we expect the headline rate to fall sharply in the second half of next year, as energy prices mean-revert and core goods inflation eases quickly, as supply chains improve and households devote a smaller share of their spending to goods.

“We continue to think, therefore, that the MPC will wait until the first half of 2023 to raise Bank Rate to 0.25%, from 0.10%. Markets currently expect rates to rise to 0.25% in Q1 2022 and then to 0.50% in Q3 2022, so, if we’re right, sterling will weaken soon as markets reassess the outlook for monetary policy.”

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