Bank of England on brink of rate hike pause after inflation surprise

LONDON, Sept 21 (Reuters) – The Bank of England will announce on Thursday whether it is halting a run of interest rate hikes that stretches back to December 2021, a day after signs that it had turned a corner in tackling Britain’s high inflation problem.

Investors piled into bets on the BoE keeping Bank Rate at 5.25% on Wednesday as soon as official data showed a surprise fall in the pace of price growth.

Goldman Sachs and other banks ditched their previous calls for one more rate increase and investors put a roughly 50% chance on a pause by the BoE, up from just 20% on Tuesday.

Other analysts said they still thought a final BoE rate hike was the most likely outcome after a recent jump in global oil prices, but they stressed it could go either way.

“We stick with our call for a hike, but now see this as a coin toss,” JP Morgan economist Allan Monks said.

BoE Governor Andrew Bailey and his colleagues on the Monetary Policy Committee have faced intense criticism after consumer price inflation surpassed 11% in October last year.

At 6.7% in August, inflation is falling towards the 5% level that the BoE predicts for the coming months – and which British Prime Minister Rishi Sunak has promised to voters ahead of an election expected next year.

But it remains more than three times the BoE’s 2% target and the highest in the Group of Seven economies.

HIGHER FOR LONGER

Bailey and other officials have stressed in recent weeks that, while they might be close to reaching the peak of their run of rate hikes, they would probably have to keep borrowing costs at high levels for a period, dashing hopes of quick cuts.

Whether it raises rates one more time or not, the challenge for the BoE is likely to be to convince investors that it will stick to its guns and not rush to cut rates even as Britain’s already fragile economy shows signs of weakening.

“While the BoE will no doubt try to project a ‘higher for longer’ message, as the ECB has since its rate hike last week, history tells us that once the peak is in, forward rates move notably lower,” Dominic Bunning, head of European FX Research at HSBC, said in a note to clients.

The BoE is alarmed that wages have so far defied the slowdown in the broader economy and are rising at a record pace, threatening to thwart its attempts to bring inflation down.

British inflation is almost double the rate in the United States, where the Federal Reserve on Wednesday kept borrowing costs on hold.

Last week, the European Central Bank raised rates to a record high but signalled that it was likely to pause.

The BoE is scheduled to make its announcement at 12 p.m. (1100 GMT) on Thursday. It is not due to hold a press conference.

As well as its decision on rates, the central bank is expected to give details of the next phase of programme to reduce the stockpile of government bonds which it amassed over a decade and a half to help the economy during the global financial crisis and the COVID-19 pandemic.

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