The Bank of England is expected to hike interest rates again on Thursday as it struggles to contain rising inflation and sluggish economic growth.
The Bank’s Monetary Policy Committee is expected to hike interest rates for the fifth straight month – to a rate of 1.25 percent.
At its May meeting, the bank raised interest rates to 1 percent, the highest level in 13 years.
If they make another hike on Thursday, it would be the first time since January 2009 that the rate is higher than 1 percent.
Some had even speculated that it could reach 1.5 percent — a so-called 50 basis point rise.
But that was before official data showed gross domestic product (GDP) contracted 0.3 percent, worse than many had predicted.
It will now be up to the nine-member committee to decide what the best result is. These include Andrew Bailey, the Bank’s Governor, two Deputy Governors: Sir Jon Cunliffe and Ben Broadbent; but also Huw Pill, his chief economist.
“April GDP data … will certainly mean that the internal bloc — Bailey, Broadbent and Pill — sticks by raising interest rates by 0.25 percent this month,” said Samuel Tombs, UK chief economist at Pantheon Macroeconomics.
“And with some members last month thinking the guidance on further rate hikes was outdated, we expect at least one of them, most likely Cunliffe, to vote for no change.
“With markets currently pricing in a 34 basis point hike in Bank Rate this week and another 41 basis point hike for the August meeting, we expect both rate expectations and Sterling to fall after this week’s meeting. “
Committee members will want to rein in inflation, which has reached levels not seen in decades.
Laith Khalaf, head of investment research at AJ Bell, said: “The Bank of England will be severely tested when it comes to its next interest rate decision and any hesitation will likely result in sterling being punished in the FX markets.”
Such a drop would mean that the prices of petrol and diesel and other imports that the UK pays for in dollars would rise. This month the average price to register a family car surpassed £100 for the first time.
Any further jump is unlikely to be welcomed by the drivers. There are many signs that the bank could hike rates. The MPC has voted for an increase at each of the last four sessions in December, February, March and May. Last time, three out of nine members of the Monetary Policy Committee voted to set interest rates at 1.25 percent.
However, a lot has changed since then. The UK economy appears to be struggling as an OECD forecast predicts it will be the weakest in the G7 next year.
“By raising interest rates, the bank is slowing down an economy that is already slowing on its own,” Khalaf said.
“That risks the economy stalling or, worse, going into reverse.”
The chancellor has given some more leeway to the bank, which will pass billions on to struggling households to help them cope with rising energy bills.
A rate hike will eat up some of that handout because the cost of borrowing for homeowners will rise. But motorists would also suffer if interest rates were left unchanged, and savers would benefit from an increase.
People are certainly anticipating rising numbers. According to a survey commissioned by the Bank of England and conducted by Ipsos in early May, 70 percent of people expect interest rates to rise over the next 12 months.
The poll released on Friday showed that 28 percent thought a rate hike would benefit the economy, 22 percent said the same about a rate cut and 28 percent wanted them to remain at current levels.
Additional coverage by Press Association.