Bank of England to “stick with” 0.50% rate hike

The Monetary Policy Committee is expected to hike the base rate by 0.50% next Thursday, despite suggestions that a steeper 0.75% increase could be put in place instead.

Research consultancy Pantheon Macroeconomics noted that the Bank Governor Andrew Bailey has openly referred to a 0.50% rate hike, while economists reckon such an increase still qualifies as acting “forcefully”.

The Bank of England last met at the start of August, raising the base rate from 1.25% to 1.75%, which is now filtering through to the cost of mortgages.

Pantheon’s The UK Economic Monitor, written by economists Samuel Tombs and Gabriella Dickens, said: “On balance, data released since the MPC’s last meeting suggest that the Committee does not need to rush to hike Bank Rate.

“For a start, GDP is tracking a slightly lower path than the Committee expected; the meagre 0.2% month-to-month rise in July has set up quarter-on-quarter growth in Q3 comfortably to undershoot the MPC’s 0.4% forecast.

“In addition, the S&P/Global composite PMI fell below 50 in August, while similar indicators from the CBI and Lloyds also suggest that economic activity began to decline last month.

“Meanwhile, the extra bank holiday for the Queen’s funeral likely will depress GDP by at least 0.2pp in September.”

According to the pair GDP will be unchanged between Q2 and Q3, though they admitted a contraction “cannot be ruled out”.

Pantheon noted that the Monetary Policy Committee will likely be relieved that inflation fell to 9.9% in August from 10.1%, meaning it’s in line with the Bank’s August forecast.

Meanwhile the government’s energy price freeze should have some impact on curbing inflation.

The research consultancy concluded: “We think that a majority of Committee members will vote to raise Bank Rate by 50bp, but we expect both hawkish and dovish dissent. #

“Recent comments to the Treasury Committee—see page four—suggest Silvana Tenreyro will remain cautious and vote for only a 25bp increase, while Catherine Mann likely will vote for a 75bp hike.

“We wouldn’t rule out new member Swati Dhingra joining Silvana Tenreyro, given that she emphasised the weakness of consumers’ confidence at her Treasury Committee appointment hearing, but it is rare for new joiners to deviate from the consensus at their first meeting.

“ Finally, we think that the MPC will confirm that it will start active gilt sales at a pace of £10B per quarter, in line with the plan set out at August’s meeting.”

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