The Bank of England is poised to unveil its biggest rate hike in 33 years next week as the central bank continues its efforts to tame inflation.
The main meeting of the Monetary Policy Committee (MPC) comes amid warnings that austerity and tax hikes under new Prime Minister Rishi Sunak could lead to a deeper and more lasting recession.
Most economists believe the MPC is likely to raise interest rates by 0.75 percentage points to 3 percent at its meeting on Thursday, Nov. 3.
It will be the eighth consecutive rise in interest rates by the Bank, but it will be the largest increase since 1989.
Earlier this month, markets had predicted that interest rates could rise as much as one percentage point, but sentiment has calmed down somewhat after the Chancellor and Prime Minister’s changes and Bank of England bond purchases pushed down borrowing costs.
Markets have also witnessed a diminished appetite for major gains worldwide, with the Bank of Canada raising its interest rate by 0.5 percentage points, below the 0.75 percentage point increase widely forecast.
Nevertheless, Bank of England governor Andrew Bailey said earlier this month that it was likely the rate hike could be greater than the 0.5 percentage point rise to 2.25% seen at the previous meeting.
He said on Oct. 15, “As things stand today, my best guess is that inflationary pressures will require a stronger response than we might have thought in August.”
Deutsche Bank analysts have said they expect the Bank of England to opt for a 0.75 percentage point increase with a parts vote.
The company’s experts said they expect the latest Bank of England forecasts, which will also be unveiled on Thursday, to show that “the economic outlook has deteriorated further”.
They added: “Depending on market prices, the UK economy is likely to enter a deeper and longer-lasting recession.”
The Bank will also confirm its longer-term inflation expectations, which should show that the cost of living will be much higher than the central bank’s 2% target next year.
ING’s developed markets analyst James Smith also had a bleak forecast for Bank’s most recent economic outlook.
“The new set of forecast forecasts, which are crucially based on market interest rate expectations, are likely to be bleak — both a deep recession and inflation falling below target over the medium term,” he said.
“That should be read as a not-so-subtle hint that market prices are not aligned with the inflation target.”