By William Schomberg
LONDON (Reuters) – The Bank of England is set to raise interest rates for the 10th time in a row on Thursday to keep up its fight against rampant inflation, but it may also drop a hint of when it will end the sharp contraction in borrowing costs. .
With Britain’s economy already tipped to enter recession and outperform its peers in 2023, Governor Andrew Bailey and his colleagues must consider how long their rise will be delayed rates to date, starting in December 2021.
Unemployment is near its lowest level since 1974 but the housing market is cooling rapidly and confidence among consumers and employers is weak.
Public service worker strikes have added to the sense of gloom in an economy still struggling to adjust to Brexit and the coronavirus pandemic.
Bailey said there was hope the price hike was turning a corner after consumer price inflation fell from a 41-year high of 11.1% in October to 10.5% in December.
But core inflation has not fallen and wages are growing at the fastest pace on record except during the pandemic when state support distorted the data.
The BoE’s Chief Economist, Huw Pill, has warned that there is a risk of price growth exceeding the BoE’s 2% target.
“I’m more concerned that underlying inflationary pressures are far from playing out,” John Gieve, a former BoE deputy governor, told the Times. “Earnings in particular are growing strongly especially in the private sector as businesses still expect to be able to raise prices.”
Investors are largely pricing in another half a percentage point rate hike at 1200 GMT on Thursday, taking the Bank Rate to 4.0%, the highest rate since 2008, although some see a slim chance of a quarter point.
On Wednesday, the US Federal Reserve slowed the pace of rate hikes by a quarter point but said it expected further increases would be needed.
The European Central Bank looks set to raise rates by half a percentage point on Thursday to 2.5% and the biggest question for investors is how much more tightening it will signal.
As of Wednesday, investors were pricing in a roughly two-in-three chance that BoE rates will peak at 4.5% by June, with the possibility of an earlier stop at 4.25%.
Ahead of the BoE meeting in November, investors had expected rates to peak at around 5.25%.
The fall in market expectations will add to the BoE’s new projections on Thursday.
The economy is expected to report a smaller contraction in 2023 than its forecast of 1.5% in November. Earlier this week the International Monetary Fund said the British economy would shrink by 0.6% this year.
The BoE’s inflation forecasts are also likely to change with the recent sharp fall in international gas prices and the rise in the value of inflation in sterling falling later this year.
But less troublesome – although still weak – the growth outlook could push up the BoE’s forecasts for inflation in two to three years.
Paul Dales, an economist with Capital Economics, said the central bank was approaching the moment when it would have to give new guidance on its rate plans, having so far promised to act “strongly” to fight inflation.
“We think continued inflationary pressures will mean rates will remain at their peak for about a year before tapering off in 2024,” Dales said.
Bailey and other senior officials are due to hold a news conference at 1230 GMT.
The BoE is also due to update its estimate of the inflation-adjusted unemployment rate. A rise in the non-accelerating rate of unemployment inflation would be a lower speed limit for Britain’s already sluggish economy.
(Writing by William Schomberg; editing by Jonathan Oatis)