The Bank of England is not yet done with rate rises as it battles inflation running at more than four times its target but the economy is still unlikely to fall into recession, a Reuters poll of economists found.
In December 2021 the BoE was one of the first major central banks to draw a line under its ultra-loose pandemic-era monetary policy. It has now raised borrowing costs by 440 basis points across 12 consecutive meetings in modest-sized rate rises. But that has so far failed to control inflation. Consumer prices rose 8.7% in annual terms in April, the joint highest among Group of Seven advanced economies, while a closely-watched measure of core price rises surged to a 31-year high.
All 64 economists polled June 12-14 said the BoE would add another 25 basis points to Bank Rate on June 22, taking it to 4.75%.
Ellie Henderson of Investec said, "a 25 basis point hike is our forecast based on the fact the Bank may think it has to do more to tame inflationary pressures especially given that hot inflation print."
A majority of economists surveyed, 52 of 64, said Bank Rate will have peaked by end-August with the median forecast putting it at 5.00%. That was in line with a snap poll taken after the latest inflation data but higher than the 4.50% in a May 5 poll. Eleven banks - including five gilt-edged market makers which are primary dealers in UK government bonds - said the peak would be higher, at 5.25%. One economist saw it topping out at 5.50% in Q4.
BoE Governor Andrew Bailey, as well as policymakers Jonathan Haskel and Catherine Mann, have all struck a hawkish tone in the past week. Incoming rate-setter Megan Greene, who joins the Monetary Policy Committee next month and replaces the dovish Silvana Tenreyro, signalled on Tuesday the central bank may have a tough job returning inflation to target.
Markets are currently pricing in a peak of around 5.75%.
When asked about the risk to their terminal rate forecast, all 20 economists who answered an additional question said it was that it ends higher than they expect. "Even as the Bank of England was among the first of the large central banks to engage in rate hikes in late-2021, the UK's inflation persistence means it will be among the last to complete its hiking cycle," said Stefan Koopman at Rabobank.
The U.S. Federal Reserve is expected to not raise interest rates for the first time in well over a year at the conclusion of its meeting later on Wednesday. But a significant minority of economists in a separate Reuters poll predicted at least one more hike as the economy remains resilient.
Although starting later, both the Fed and the European Central Bank have largely been raising rates in greater magnitudes than the BoE.
SLOW GROWTH
Britain's economy grew 0.2% month-on-month as expected in April, official data showed earlier on Wednesday, and the Reuters poll suggested it would dodge a recession and instead grow modestly. After flatlining this quarter GDP was predicted to expand 0.2% in each of the following three quarters.
Inflation was expected to drift down but wasn't seen at the Bank's 2% target until 2025. It will average 7.1% this year, 2.7% next and 2.0% in 2025, the poll showed. But the vast majority who responded to an extra question, 16 of 17, said the risk was inflation falls slower than they expect rather than faster.
"We have to learn from the past few months where inflation has been stickier than we expected, but we do have forces bringing inflation down," Investec's Henderson said.
Interest rates will remain high for years, says former Bank governor
Britain will face high interest rates for years to come, a former Bank of England governor has predicted as concern continues over soaring mortgage deal prices.
Former Bank governor Mark Carney warns of 'higher longer-term interest rates'
Inflation revealed this Wednesday at 7am and Bank rate this Thursday at 12pm
Mark Carney, who ran the Bank from 2013 to 2020, warned "big tectonic shifts in the global economy' will result in 'higher longer-term interest rates for a period, anyone who fixed just at the right time and still has a low interest rate on their deal should 'recognise that there will be an adjustment over the medium term."
His comments came as the average two-year fixed rate mortgage deal rose to 5.92% today – up from 5.9% yesterday and 5.49% a fortnight ago. It means the average two-year deal is now nearly at 6% - and, if it continues to rise at a rate of 0.02 points per working day, it will hit that figure this Wednesday.
Data released by Moneyfacts also showed the average five-year rate rose to 5.56% today - up from 5.54 per cent yesterday and 5.17% two weeks ago. Meanwhile the number of mortgage products available also increased last week - now standing at 5,082, which was a rise from 5,018 previously and 4,967 a fortnight ago.
Experts have warned of a 'huge week' for mortgages as the latest inflation rate is released this Wednesday, before any change to the Bank's base rate one day later. The Bank is widely expected to raise the base rate this Thursday from its current level of 4.5%, marking the 13th consecutive rise in just 18 months.
Mortgage rates will stay high for years and beyond end of most fixed-rate deals, warns former Bank of England boss as average deals could hit 6% within days
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Mortgage rates will stay high for years and beyond end of most fixed-rate deals, warns former Bank of England boss as average deals could hit 6% within days
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Inflation is currently running at 8.7 %, with the latest figure due out this Wednesday
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The Bank of England base rate is currently at 4.5% and is set to rise furthe this week
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The Bank of England base rate is currently at 4.5% and is set to rise further this week
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Bank of England launches external review into how it forecasts inflation, following criticism of interest rate setter's wide-of-the-mark predictions
The Bank of England is calling in external help to review how it forecasts inflation, having faced criticism over the last 18 months for failing to accurately estimate price rises. Bank of England chair of court David Roberts said in a letter published by the Treasury Committee that the bank had 'decided to commission a broad review' into its forecasting and 'related processes' at times of 'significant uncertainty'.
Roberts told Treasury Committee chair Harriett Baldwin MP "the review would be externally led, supported by the bank's Independent Evaluation Office, and that its findings would be open and transparent."
The Bank of England has faced criticism since spiralling inflationary pressures began to enter the economy at the start of 2022. The bank has consistently underestimated both the pace and 'stickiness' of UK consumer price inflation, and critics argue it should have started initiating interest rate hikes earlier and more aggressively.
Roberts was writing to Baldwin in response to a letter in which she cited "concerns around the ability of the bank to forecast inflation, I acknowledge it currently does so in the face of a number of historically large shocks to the economy, but this only increases the importance of ensuring that the forecasts are produced transparently and using the best possible practice. Given the importance of the inflation forecast as part of the [Monetary Policy Committee's] processes and communications, I therefore write to ask you to consider commissioning the bank's Independent Evaluation Office to undertake urgent work assessing the current effectiveness of the Bank's forecasting platform."
Speaking to the Treasury Committee last month, the BoE's chief economist Huw Pill acknowledged the bank's failure to accurately forecast price rises over the last year, he said, "we recognise that our forecasts of inflation have been too low and we are trying to understand why we have made those errors, interpret those errors in terms of the behaviour and then make an assessment as to whether that behaviour will continue into the future. Models are essentially taking averages of behaviour in the past.'
The Bank of England is widely expected to hike interest rates again next week to 4.75%, marking its 13th consecutive hike. Inflation remains stubbornly high at 8.7% against a backdrop of rising wages, a tight labour market and meagre economic growth.
The Bank still expects inflation to fall to its 2% target by year-end
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Markets are now pricing in a base rate peak of 5.75%, but some economists have suggested it could go even higher – and stay there for some time to come. Susannah Streeter, head of money and markets at Hargreaves Lansdown said, "at the point when the Bank of England chooses to press pause, immediate cuts in interest rates aren't expected. Inflation is still likely to be a threat, partly because of the ongoing fight for talent across the labour market. Brexit is considered to have made this more acute, particularly for certain industries, such as healthcare. This has had a knock-on effect on another problem facing the economy – the high numbers of long-term sick, given that a lack of staff is likely to mean longer waits for treatment. With so many people too sick to work, jobs market tightness is expected to remain."