Bank of England boss Andrew Bailey said he needed to put a brake on interest rates
- The bank expects to raise the base rate by another 0.25 percentage point this week
- But with inflation falling, calls are being made to slow down the pace of interest rate hikes
- EY Item Club’s Martin Beck says increases are ‘increasingly difficult to justify’
‘Overreaction’: Andrew Bailey, Governor of the Bank of England
The Bank of England is under pressure to hit the pause button on rate hikes amid predictions that its own inflation forecast will be revised to ‘near zero’.
Traders expect the Bank to raise its base rate by another quarter of a percentage point this week to 5.25 percent — its 14th straight increase.
It has raised the cost of borrowing from 0.1 percent in December 2021 to curb runaway prices, which took off after the Russian invasion of Ukraine sent food and energy bills soaring.
But with inflation slowing, further rate hikes are “increasingly difficult to justify,” said Martin Beck, chief economic adviser to the EY Item Club, who uses the Treasury’s forecasting models.
“The Bank is too focused on the past,” he said. “All forward indicators look better.”
There are fears that Governor Andrew Bailey, who has been criticized for letting inflation rip in the first place, could now go too far in the other direction and plunge the economy into recession.
It emerged last week that most of Chancellor Jeremy Hunt’s economic advisers believe the cycle of rate hikes needs to be slowed down to avoid a slump.
Inflation is still at 7.9 percent, well above the bank’s target of 2 percent. But experts say a combination of higher interest rates, falling energy prices and a stronger pound means Bailey will unveil a downgrade to the Bank’s own forecast this week, saying inflation will fall below target by the end of next year.
Beck said, “The inflation forecast could be close to zero in two years.”
Markets are expecting a peak of just under 6 percent early next year, lower than predicted a few weeks ago.
Inflation on the consumer price index was 7.9 percent in June, compared to 8.7 percent in May
The cost of fixed-rate mortgages priced on these forecasts has started to fall as a result.
Nationwide Building Society, HSBC, Barclays and TSB cut the cost of home loans by up to 0.55 percentage points last week.
“The markets are saying inflation is coming down and key interest rates are at or near their peak,” said Gerard Lyons, chief economic strategist at asset manager Netwealth.
But not all economists are convinced that Bailey should slow down now.
“There is a danger that the Bank will become complacent with falling headline inflation,” said Andrew Sentance, a former member of the Bank of England’s rate-setting Monetary Policy Committee.
Measures of underlying inflation fell only slightly from the latest data. If I had MPC now, I would still vote for a fare increase in August.’