The Bank of England is all set to end its tightening cycle with a final rate hike this week as any further increase will push the UK economy into a deep recession.
The record high wage growth as well as persistently high inflation strengthened the call for additional policy tightening.
However, the past rate hikes have started to damp the economic activity. Recent economic indicators suggest that the economy has entered a mild recession.
Markets widely anticipate a quarter-point increase on September 21, a day after the release of the consumer price inflation data.
Although inflation has continued to weaken over the recent months, July’s 6.8 percent was more than double the official target of 2 percent.
The central bank has increased its policy rate over the last 14 consecutive sessions. At 5.25 percent, the bank rate is currently the highest since early 2008.
As seen in August, a three-way split on the nine-member Monetary Policy Committee, led by Governor Andrew Bailey, is more likely with members seeking a half percentage point and a quarter point hike, while others calling for no change.
Capital Economics’ economist Paul Dales said sticky inflation would force the BoE to keep interest rates at their peak 5.50 percent until late in 2024.
However, once the bank eventually starts cutting the rate, they will be reduced further and faster than investors anticipate, Dales added.
The BoE can probably afford to end its tightening cycle this week, ING economists said.
“Assuming though that the fall in services inflation and wage growth is pretty gradual, we think a rate cut is unlikely until at least the second quarter of next year,” they added.
At the August meeting, BoE policymakers had signaled that the interest rate is set to remain high for long.
They said it will be ensured that bank rate is sufficiently restrictive for sufficiently long to return inflation to the 2 percent target sustainably in the medium term.
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