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‘It’s going soft’ – Bank of England in rate hike reversal as inflation falls ultimately | Personal Finance | Finance


The Bank of England has repeatedly hiked rates of interest over the past 12 months but now it could decelerate. If it does, that might spare us from a fair deeper recession and ease the pressure on borrowers and the housing market.

Members of the bank’s monetary policy committee (MPC) will reveal their latest base rate decision on Thursday.

Analysts reckon the MPC will hike rate yet again, but is more likely to soften its policy amid signs price growth is slowing.

They still expect it to hike base rates by one other 0.5 percent, making it the ninth consecutive rate hike because the BoE battles to tame rampant inflation. Yet that is a smaller increase than last time.

Consumer price growth hit a 41-year high of 11.1 percent in October, dramatically above its goal rate of just two percent. Yet within the US it has been slowing since June and it dropped within the eurozone last month.

The recent recovery within the pound may help curb inflation, because it cuts the price of imports.

A 0.5 percent hike will lift bank rate to three.5 percent, up from just 0.1 percent a 12 months ago in December 2021.

If correct, this may represent the MPC taking its foot off the accelerator, after mountaineering by 0.75 percent in November.

While this is just not a dramatic change in itself, it’s a step in the suitable direction. It could mark the start of the top for rate hikes.

Analysts say the BoE might be emboldened by falling public expectations for inflation over the subsequent few years, which dipped to three.9 percent in November, in response to the Citi/YouGov monthly survey, closely observed by the MPC.

This was down from 4.2 percent in October and was comfortably below the August peak of 4.8 percent, easing pressure on the BoE to boost rates.

In one other key measure watched by the MPC, the November Decision Makers Panel (DMP) survey show that companies now expect to extend their prices at a slower rate, easing pressures within the shops.

Deutsche Bank chief UK economist Sanjay Raja anticipates a 0.50 percent rate hike on Thursday saying: “Some excellent news around softening inflation expectations and easing recruitment difficulties will allow the MPC to slow the pace of tightening.”

Rates setters on the US Federal Reserve and European Central Bank are also expected to hike rates by 0.50 percent next week, again, marking a slowdown.

AJ Bell investment director Russ Mould said markets expect rates of interest to peak in the primary half of next 12 months, with the primary cuts coming in late 2023 or early 2024. “The anticipated pivot has done much to assist global share and bond prices rally since early October.”

Central bankers fear a Seventies-style wage spiral if inflation is just not brought back under control quickly, but are wary of worsening the recession and driving up unemployment from today’s low 3.6 percent, Mould added. 

READ MORE: BoE leaves taxpayers with £200bn bill and you may pay it

Higher rates of interest will menace the housing market with mortgage lending expected to fall 15 percent next 12 months, while property transactions will plunge by 21 percent, in response to UK Finance.

James Tatch, principal, data and research at UK Finance, said the mortgage market looks weak “as house prices, the price of living and rate of interest pressures put a brake on recent demand”.

November’s consumer price inflation figure is published on Wednesday with markets anticipating a slight dip, but with the speed still in double digits.

ING Direct’s developed markets economist James Smith said inflation can have peaked but is unlikely to fall below double-digits until early next 12 months.

He also anticipates a 0.50 percent base rate hike on Thursday, followed by a rise of either 0.25 percent or 0.50 percent in February. “Peak for bank rate is more likely to be around 4 percent, a bit of below what markets at the moment are pricing.”

Nonetheless, Smith also warned that nothing is definite as inflation is just not beaten yet.

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