Bank of England set to hike interest rates to 1.25% to fight inflation Business News

The Bank of England is expected to raise interest rates again on Thursday as it struggles to temper rising inflation and weak economic growth.

The Bank’s Monetary Policy Committee is expected to raise the base interest rate for the fifth consecutive time to 1.25%.

At its May meeting, the Bank raised the base rate to 1%, its highest level in 13 years.

If they make another increase on Thursday, it would be the first time since January 2009 that the rate was above 1%.

Some had even speculated that it could reach 1.5% – a so-called 50 basis point hike.

But that was before official data showed gross domestic product (GDP) fell 0.3%, worse than many had expected.

It will now be up to the nine-person committee to decide which is the best outcome. These include Andrew Bailey, the Bank’s Governor, two Deputy Governors: Sir Jon Cunliffe and Ben Broadbent; but also Huw Pill, its chief economist.

“April’s GDP data…will surely mean the inner bloc – Bailey, Broadbent and Pill – sticks to voting to raise the Bank Rate by 0.25% this month,” said Samuel Tombs , Chief UK Economist at Pantheon Macroeconomics.

“And given that some members last month thought guidance for further interest rate hikes was outdated, we expect to see at least one of them, most likely Cunliffe, vote for no change.

“With markets currently pricing in a 34 basis point rise in the Bank Rate this week and a further 41 basis point hike for the August meeting, we expect rate expectations and the pound sterling decline following this week’s meeting.”

Committee members will want to control inflation, which has reached levels not seen in decades.

Laith Khalaf, head of investment analysis at AJ Bell, said: “The Bank of England faces a severe test of its mettle in the next interest rate decision, and any hesitation is likely to result in a punishment of the pound on the foreign exchange markets.”

Such a drop would mean that the price of petrol and diesel, and other imports that the UK pays in dollars, would rise. This month the average deposit price for a family car topped £100 for the first time.

Any extra jump is unlikely to be welcomed by drivers. There are many signs that the Bank could raise rates. The MPC has voted for an increase at each of the last four meetings, in December, February, March and May. Last time, three of the nine members of the Monetary Policy Committee already voted to set rates at 1.25%.

However, some things have changed since then. Britain’s economy appears to be struggling, with an OECD forecast predicting it will be the weakest in the G7 next year.

“By raising interest rates, the Bank is putting the brakes on an economy that is already slowing on its own,” Mr. Khalaf said.

“It risks stagnating the economy, or worse, backtracking.”

The Bank has been given a bit more leeway by the Chancellor, who is expected to funnel billions to struggling households to help them cope with rising energy bills.

A rise in interest rates will eat away at some of this handout, as the cost of borrowing will rise for homeowners. But drivers would also suffer if rates were maintained and savers would benefit from a hike.

People are certainly expecting increases. According to a survey commissioned by the Bank of England and carried out by Ipsos in early May, 70% of people expect rates to rise over the next 12 months.

The survey, released on Friday, showed 28% thought a rate hike would be good for the economy, 22% said the same about a cut and 28% want them to stay at current levels. .

Additional reporting by Press Association.