Bank of England weighs up ending its rate hike run

On Thursday, the Bank of England (BoE) will decide whether to halt its long run of interest rate hikes or push them up again, probably for one last time, despite anxieties over how banks in the United States and Europe are coping with higher borrowing costs.

The BoE’s history with interest rate hikes

Bank Rate has increased ten times in a row, and the BoE signaled in February that it was getting close to a pause. However, most economists polled this week by Reuters said it would probably opt for an 11th straight rate hike on Thursday, representing the end of a tightening cycle that began in late 2021. A 25 basis-point rise would take Bank Rate to 4.25%, where most economists said it would stay for at least a year.

Investor anxiety over banks

While most economists predict another rate hike, investors have become more doubtful about the BoE’s appetite for more rate hikes recently. This is because they have mounting anxieties about the global banking sector, and recent events have not done much to calm their nerves. For example, U.S. lender Silicon Valley Bank collapsed, and Credit Suisse’s share price plunged, which forced the Swiss central bank to pump in emergency liquidity. On Thursday, big U.S. banks injected funds into First Republic Bank.

Economists at Investec said the turmoil in markets had led them to change their call for the BoE’s decision to no change. “To our judgment, a pause seems to be the most likely outturn, although that does not necessarily imply that tightening has finished,” they said in a note to clients.

Opinions on what the BoE will decide

Analysts at RBC Capital Markets said they still thought BoE Governor Andrew Bailey and his colleagues would raise rates one more time next week by 25 basis points, even after the European Central Bank pushed up its key rates by half a percentage point on Thursday, despite the financial sector upheaval.

Investors expect a 25 basis-point rate hike from the U.S. Federal Reserve on Wednesday, a day before the BoE’s announcement.

Related Facts

• The BoE was the first major central bank to start raising rates in December 2021 and could be the second to halt the run after the Bank of Canada earlier this month.
• British inflation is set to fall this year after hitting a 41-year high of 11.1% in October.
• The economy is expected to shrink in 2023, even if there have been some signs of a recovery.

Key Takeaway

Whether to hike one last time or pause could go either way, but most economists predict a rate hike. However, recent global events have caused anxiety among investors, which may prompt a change in the expectation for rate hikes. Nevertheless, the BoE has remained relatively firm on delivering rate changes in the past, so it remains to be seen what the outcome will be.

Conclusion

The Bank of England’s decision on Thursday will be an important indicator of its confidence in the global banking sector and the U.K.’s economy, particularly with inflation set to fall this year. Regardless, it is clear that the BoE’s history with interest rate hikes makes it a key player to watch in the global financial landscape. It will be interesting to see how its decision affects investor sentiment worldwide.