BoE to go ‘soft’ on interest rate hikes as inflation peaks

The Bank of England has repeatedly hiked interest rates over the last year but now it may slow down. If it does, that would spare us from an even deeper recession and ease the pressure on borrowers and the housing market.

Members of the bank’s monetary policy committee (MPC) will reveal their next base rate decision on Thursday.

Analysts reckon the MPC will hike rate yet again, but is likely to soften its policy amid signs price growth is slowing.

They still expect it to hike base rates by another 0.5 percent, making it the ninth consecutive rate hike as the BoE battles to tame rampant inflation. Yet that’s a smaller increase than last time.

Consumer price growth hit a 41-year high of 11.1 percent in October, dramatically above its target rate of just two percent.

A rise of 0.5 percent will lift bank rate to 3.5 percent, up from just 0.1 percent a year ago in December 2021.

If correct, this would represent the MPC taking its foot off the accelerator, after hiking by 0.75 percent in November.

While this is not a dramatic change in itself, it is a step in the right direction. It could mark the beginning of the end for rate hikes.

Analysts say the BoE will be emboldened by falling public expectations for inflation over the next few years, which dipped to 3.9 percent in November, according to the Citi/YouGov monthly survey, closely observed by the MPC.

This was down from 4.2 percent in October and was comfortably below the August peak of 4.8 percent, easing pressure on the BoE to raise rates.

In another key measure watched by the MPC, the November Decision Makers Panel (DMP) survey show that businesses now expect to increase their prices at a slower rate, easing pressures in the shops.

Deutsche Bank chief UK economist Sanjay Raja anticipates a 0.50 percent rate hike on Thursday saying: “Some good news around softening inflation expectations and easing recruitment difficulties will allow the MPC to slow the pace of tightening.”

Rates setters at the US Federal Reserve and European Central Bank are also expected to hike rates by 0.50 percent next week, again, marking a slowdown.

AJ Bell investment director Russ Mould said markets expect interest rates to peak in the first half of next year, with the first cuts coming in late 2023 or early 2024. “The anticipated pivot has done much to help global share and bond prices rally since early October.”

Central bankers fear a 1970s-style wage spiral if inflation is not brought back under control quickly, but are wary of worsening the recession and driving up unemployment from today’s low 3.6 percent, Mould added. 

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Higher interest rates will menace the housing market with mortgage lending expected to fall 15 percent next year, while property transactions will plunge by 21 percent, according to UK Finance.

James Tatch, principal, data and research at UK Finance, said the mortgage market looks weak “as house prices, the cost of living and interest rate pressures put a brake on new demand”.

November’s consumer price inflation figure is published on Wednesday with markets anticipating a slight dip, but with the rate still in double digits.

ING Direct’s developed markets economist James Smith said inflation may have peaked but is unlikely to fall below double-digits until early next year.

He also anticipates a 0.50 percent base rate hike on Thursday, followed by an increase of either 0.25 percent or 0.50 percent in February. “Peak for bank rate is likely to be around four percent, a little below what markets are now pricing.”

However, Smith also warned that nothing is certain as inflation is not beaten yet.