Bank of England plans their last interest hike (for now)

After post-pandemic clean up and the cost of living crisis created a challenging atmosphere for the majority of the year, the Bank of England (BoE) is poised to make what many believe will be their final interest rate hike. 

This pivotal decision is set to have far-reaching implications, with economists and financial markets closely watching the outcome. Consensus is emerging that the era of rising borrowing costs, which began in December 2021, may be nearing its end.

All but one of the 65 economists surveyed by Reuters in recent days have predicted that the BoE will raise the bank rate to 5.5% this week, up from its current level of 5.25%. If this occurs, it would mark the highest interest rate since 2007. While economists are fairly confident in this outcome, other financial markets remain somewhat uncertain, with rate futures indicating a 25% chance of a pause.

Major financial institutions like Goldman Sachs and Citi also share the sentiment that Thursday’s decision may be the BoE’s final rate hike. If the Bank Rate does indeed peak at 5.5% after a staggering 14 rate hikes in rapid succession since the start of COVID, it will rank as the fourth-largest tightening cycle in the UK in the last century, following significant increases in the late 1980s and in the early and late 1970s, all of which were accompanied by recessions. 

July saw a steeper drop in economic output than expected, partly attributed to one-off factors like strikes. Additionally, the unemployment rate has exceeded the BoE’s forecast for the third quarter. These developments signify unexpected challenges and uncertainties in the economic landscape, potentially influencing the Bank’s decision-making process regarding interest rate hikes and overall monetary policy.

However, despite this, strong wage growth in the UK continues to signal inflationary risks.

The upcoming release of August’s inflation figures will be closely scrutinised by investors. 

The BoE, under Governor Andrew Bailey’s leadership, has been known to react decisively to above-forecast inflation prints, a strategy that some economists argue has muddled the central bank’s ability to convey a consistent message and manage market rates.

Besides deciding on interest rates, the Monetary Policy Committee (a key decision-making body within the Bank of England), will also reveal its strategy for selling off a large amount of British government bonds, which is called quantitative tightening. Economists expect the MPC to speed up this process, selling around £100 billion worth of bonds each year, up from the £80 billion sold in the previous year. This decision will be watched closely by financial advisors and financial markets to understand its potential impact on the economy.

Conclusion

The prospect of a pause in high inflation rates carries significant benefits for everyday people, small business owners, and the broader economy. So far it has affected us all in a variety of ways – from banks reining in lending to small businesses, to funding in the fintech industry seeing a 37% decline, to disruptions in funding affecting Series A to C stage companies. 

See: 2023 UK Fintech report reveals cautious funding trend

But now, the pause offers a glimmer of relief to households and businesses grappling with rising energy costs and other essential areas like food. 

A pause in interest rate hikes can help ease the financial burden on families, making it more affordable to service mortgages and loans. 

It should also provide businesses with breathing room to invest, expand, and create jobs again – thereby bolstering economic stability.