BOE may rise policy rate to 3.5% amid inflation

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MG News | December 08, 2022 at 10:49 AM GMT+05:00

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December 08, 2022 (MLN): The Bank of England (BoE) is likely to raise the policy rate to 3.5% from 3% next week due to double-digit inflation as the economy heads into recession.

The higher inflation is attributed to the rise in energy prices since Russia invaded Ukraine, the BoE fears bottlenecks caused by the COVID-19 pandemic and Brexit may slow inflation down.

As Reuters reported, “Shaw views November's 75 basis point rate rise as a one-off, coming after market turmoil caused by Prime Minister Liz Truss's short-lived government and new assumptions of more generous government support for household energy bills”.

But HSBC economist Liz Martins said another 75-basis-point rate rise was a possibility if official figures on economic output, inflation, and the labor market due next week were stronger than expected, it said.

With a range of views on the MPC about how near BoE rates are to a peak, a first-ever four-way vote split was possible, she added.

MPC member Catherine Mann has regularly voted for bigger rate rises than the majority this year and remains concerned about the public and businesses' expectations for inflation over the medium term, which is well above the BoE's 2% target, Reuters reported.

“Financial markets currently see BoE rates peaking at 4.75% by the middle of next year, while HSBC expects the BoE to stop at 3.75% in February and Investec predicts a peak of 4%”, it added.

Last month, Monetary Policy Committee (MPC) members have voted to raise the rate to 3%, but Silvana Tenreyro voted for a quarter-point rise to 2.5% and Swati Dhingra for 2.75%, as reported by Reuters.

Earlier this year, the Bank of England predicted that Britain would enter a recession that would last until next year and shrink production by 1.7%. This is a bigger drop than anticipated and is partly due to high market rates at the time the forecasts were made.

In the financial markets, BoE rates are expected to peak at 4.75% by mid-next year, while HSBC predicts the BoE will stop at 3.75% in February and Investec predicts a peak of 4%.

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