Economists forecast that the UK economy will witness a rise in interest rates to a peak of 5.5% in the upcoming month. The Bank of England policymakers anticipate the move to mitigate the potential adverse effects of increased borrowing expenses on the UK economy.
The experts also indicate that, in their endeavor to avert a prolonged recession and tackle the persistently high price inflation, the Bank is likely to give the green light for the 15th consecutive interest rate hike during its forthcoming meeting scheduled for 21 September. The move is deemed necessary as the current inflation rates remain more than three times higher than the targeted rate of 2%.
Economists foresee interest rate hike
All but one among the surveyed group of 62 economists expressed their anticipation of a quarter-percentage-point increase in the Bank’s base rate next month, elevating the rates from 5.25% to 5.5%. The sole dissenting opinion projected a larger half-point increase, potentially pushing rates to 6%.
The Bank of England has been progressively raising interest rates to curb the surge in inflation. This inflation peaked at 11.1% in October of the previous year and has since subsided to 6.8% as of July. According to the poll findings, economists foresee that inflation will average 6.8% for this current quarter and then decline to 4.7% in the fourth quarter. It is not expected to fall below the targeted 2% until at least 2025.
However, policymakers must carefully weigh the repercussions of further rate hikes. The increased borrowing costs have dampened the housing market, as consumers opt for more affordable mortgages, and they have also impacted the activities of private sector entities across the UK.
The most recent evaluations of business health, represented by the purchasing managers’ index (PMI) every month, revealed vulnerabilities in the UK’s services and manufacturing sectors. These industries exhibited their weakest performances since the Covid-related lockdown in early 2021. Companies attributed their struggles to Britain’s prevailing cost of living crisis, reduced export demand, economic outlook uncertainties, and elevated interest rates. Some experts have consequently predicted that the UK might enter a recession in the third quarter.
James Smith, a developed markets economist at ING, remarked the August bank meeting initiated the groundwork for a potential pause. The Bank is now acknowledging the restrictive nature of its policy. That marks the beginning of an effort to convince the market that higher rates will endure considerably.
It all boils down to the data, he further emphasized. In an ideal scenario, their preference would be to cease the hikes, considering that the current rates are already constraining. As we approach November, the Federal Reserve will likely have concluded its rate hikes, and he said there’s a possibility that the European Central Bank will also.