Will the Bank of England hike interest rates this week?

The turmoil in the banking sector has dampened expectations of a rate hike by the Bank of England this week as investors weigh up the possibility that the bank will opt for a pause instead.

Prior to last week, markets had embraced the likelihood of a BoE key rate hike of 25 basis points, adding 0.25 percent to bring the benchmark rate to 4.25 percent.

But the collapse of Silicon Valley Bank, broader problems within regional US banks and the emergency takeover of Credit Suisse could lead the Monetary Policy Committee to postpone its Thursday meeting.

Central banks worldwide will now be concerned that economies will be more sensitive to rate hikes and may not want to risk falling back into recession and further market chaos, even as inflation remains well above targets.

The BoE has raised base rates to 4% so far this cycle

A key driver for the BoE will be new inflation data expected by the Office for National Statistics on Wednesday, previously encouraged by improved economic growth forecasts, falling energy and commodity prices and declining wage growth and services inflation.

Consumer price inflation fell to 10.1 percent in January, boosting confidence that the cycle of rate hikes was having the desired effect. The Office for Budget Responsibility now expects inflation to fall to 2.9 percent by the end of the year.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “A week ago a rate hike seemed nailed down, but the woes of a handful of banks have reduced convictions significantly.”

However, Streeter added that systemic risk to the banking sector is “still considered low” as larger banks have larger capital buffers and stable deposits, while central banks have also said they will use “all available tools to mitigate potential contagion and further mitigate financial problems. instability’.

Nevertheless, banking shares across Europe fell sharply again on Monday, with the FTSE 350 banking index falling as much as 3 percent in early trading.

She said, “The bank can go either way to raise or pause again. But even if it chooses to wait for the dust to settle, this may not be the last of the rate hikes.”

James Lynch, fixed income asset manager at Aegon Asset Management, expects a break. He said only lower-than-expected wages in the private sector and inflation in the services sector could be “enough to halt rate hikes.”

He added: “Until the collapse of the SVB, however, the market had priced in another 90 basis points of additional hikes this year.

‘The reason was slightly better economic growth and the market followed the rise in interest rates in the US and the Eurozone. Everything has changed since the problems with the regional banks in the US.

A discussion that has taken place in central bank circles is about the sensitivity of economies to higher rates and the “long and variable delays” – at least over the past week, the pendulum has swung in favor of those taking a more cautious view. approach to monetary policy.

“For this reason, we think the BoE will not raise interest rates this week.”

The Office for Budget’s responsibility now expects CPI to fall to 2.9% by the end of the year

However, ING analysts still expect the BoE to opt for another hike on Thursday before pausing.

They said: “One thing that is clear from recent reports is that the bar for pausing rate hikes is much lower at the BoE than at the European Central Bank. Policymakers have made it clear that most of the impact of past rate hikes is yet to come, which is partly a function of the low prevalence of floating rate mortgages in the UK.

We suspect that the philosophy of at least trying to separate inflationary control from financial stability still prevails today, and this was also a line echoed by ECB President Christine Lagarde at her most recent press conference .

In short, the meeting is on the cutting edge and it will largely depend on whether stability in the financial markets starts to return.

A calmer environment in the financial markets would keep a 25 bps hike on the table. Further volatility could easily mean a ‘no change’ decision, with no-strings-attached guidance that further increases could be made if the situation changes.’

Traders are lowering expectations of the Fed’s rate hike cycle, as this BlackRock chart shows

Internationally, the ECB promised a new interest rate week last week, but expectations of a new rate hike by the US Federal Reserve have also fallen sharply.

Futures markets now see only a one in three chance that the Fed will proceed with a final rate hike next Wednesday and are now also anticipating rate cuts of as much as 1 percentage point by the end of 2023.

BlackRock Investment Institute said in a note Monday: “We have argued that reducing inflation would be costly, cause economic damage and cracks in the financial system.

“This week’s events will limit bank lending, which will strengthen our view of a recession. As the cracks appeared, market expectations for peak interest rates plummeted. The reason: the hope that central banks will come to the rescue and lower interest rates, as they have done in the past.

“That’s the old script – and it doesn’t work anymore. Central banks are determined to stubbornly fight higher inflation and use other tools to ensure financial stability. Example: The European Central Bank raised interest rates by [50bps] last week. And we see the Fed hike rates this week.

‘Our conclusion: investors need a new investment scenario and must remain alert in this new market regime.’