Markets think the Bank of England will unveil the biggest hike in interest rates for over three decades when its decision makers meet on Thursday.
The Monetary Policy Committee (MPC) is expected to increase rates by 0.75 percentage points to 2.5 per cent.
It would be the highest interest rate that the UK has had since the financial crisis. In December 2008, the base rate was slashed from 3 per cent to 2 per cent.
It would also be the highest single increase to interest rates since 1989.
“Investors think the most likely outcome is that the MPC will increase the Bank rate by 75bp (0.75 percentage points) on Thursday,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
But he said that economists are expecting a smaller rise, to 2.25 per cent – the same 0.5 percentage point change as the Bank’s last hike.
“For a start, hawkish surprises from the MPC have been far less common than dovish ones over the last year,” he said.
“In addition, Governor Bailey openly referred to a 50bp hike ahead of the August meeting, but has not given markets a nudge to price-in a 75bp hike.
“We think that the MPC still will deem a 50bp increase to be consistent with its pledge to act ‘forcefully’, if it sees signs of more persistent inflationary pressures.”
ING economist James Smith said that the Bank of England will have to react to recent falls in the price of the pound. Sterling hit a new 37-year low against the dollar on Friday.
“The Bank of England meeting is crucial,” he said.
“It will tell us not only how worried policymakers are about the slide in sterling and other UK markets, but also how the Government’s decision to cap household/business energy prices will translate into monetary policy.”
“We narrowly favour a 50bp hike on Thursday, taking the Bank Rate to 2.25 per cent, although 75bp is clearly on the table and we would expect at least a couple of policymakers to vote for it.”
He said that rates will likely rise again in November and December, hitting 3 per cent by the end of the year.
The decision to hike interest rates is a bid to keep inflation under control. It is the best tool that the Bank of England has to steer inflation – currently at 9.9 per cent – back to its 2 per cent target.
But the decisions will also have major impacts on people’s finances, not least those with mortgages who will need to start paying more for their home loans.
The MPC was originally set to announce its decision on September 15, but delayed this for a week due to the Queen’s death.
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