Interest rate rise on cards

THE Bank of England is still expected to increase interest rates by 0.75 per cent at its next meeting on Thursday, despite growing calls for it to slow the pace of rate hikes.

Consumer price inflation surprised analysts last week by falling to 9.9 per cent in the year to August, down from 10.1 per cent in July.

Goldman Sachs’s prediction that inflation could rise by 22 per cent next spring now looks unlikely, after the Government froze the energy cap at £2,500 for two years, cutting bills.

Analysts Capital Economics reckon inflation will hit 5.2 per cent in the second quarter of next year.

Yet markets still expect the BOE to hike bank rate aggressively on Thursday, as it battles to curb consumer price growth.

They are pricing in a 65 per cent chance of a 0.75 per cent rise, which would lift base rates to 2.50 per cent. There is a 35 per cent chance of a half-point increase to 2.25 per cent.

Other central bankers are tightening aggressively, with the European Central Bank increasing all three of its policy rates by 0.75 per cent earlier this month.

The US Federal Reserve is expected to increase by 0.75 per cent on Wednesday, having already pushed through four rate hikes in 2022. That would lift the Fed Funds rate to 3.25 per cent, the highest since 2008.

Kingswood investment strategist Rupert Thompson said the BOE could feel pressure to follow suit as it tries to cut inflation to its 2 per cent target.

But there is a chance it will take a softer line to avoid driving up business and consumer borrowing costs: “Falling inflation means a 0.75 per cent increase now looks less likely, although rates still look certain to be raised by at least 0.5 per cent.”

Walid Koudmani, chief market analyst at financial brokerage XTB, said the BOE faces a tough job as the pound falls to a 37-year low against the US dollar of $1.135: “It must balance managing inflation and supporting the currency while not negatively affecting the economy.”