he City spotlight is back on the Bank of England amid mounting speculation that its long run of rate hikes may have already reached its peak.
The Bank’s latest decision is due at noon on Thursday. After 14 consecutive rises took the base cost of borrowing to 5.25%, a 15-year high in a long drawn out fight against inflation, there were growing signs this week that the intended effect was finally kicking in.
The main measure of inflation, the headline consumer price index, fell by more than forecast for August, to 6.7% and closer to the BOE’s official 2% target. It was the second time in two months that the CPI surprised with a bigger drop.
The core CPI, which the Bank pays close attention to, fell sharply from 6.9% to 6.2%.
Hopes spread that it the BOE’s medicine to ease rising prices and the cost of living crisis was working, perhaps by enough for a fifteenth hike to be avoided tomorrow. Or at least that if a quarter-point rise to 5.5% does go through, it will come with a signal that it would be the last move for a while.
Any action will lift the cost of tracker-rate mortgages straight away, limiting consumers’s spending power. and the higher base rate also feeds through to the cost of millions of personal and corporate loans over time.
“The last thing businesses need now is a further increase in borrowing costs,” said Kevin Pratt at Forbes Advisor.
“UK business leaders will be hoping rate-setters will hold their nerve and pause increases so that the full effect of 14 consecutive Bank Rate hikes can be gauged. It takes at least a year for the impact of a rate change to feed through to the wider economy, so it makes sense to take stock and hold the cost of borrowing at present levels.”
Any arrival at peak rates, or pause in hikes, is far from a done deal. In August, the nine-member Monetary Policy Committee voted by six to three to raise rates by a quarter point, with two dissenters in favour of a bigger, half-point hike and one backing no change. Governor Andrew Bailey voted for the quarter-point rise that carried the day.
Edward Hutchings, head of rates at Aviva Investors, said: “We expect the BoE to deliver a further [quarter-point] hike this week … this will likely be the last hike in this interest rate cycle unless employment data strengthens significantly further from here.”
CPI peaked at 11.1% in October 2022, fuelled by the impact of rising energy prices after Vladimir Putin’s invasion of Ukraine. The BOE base rate was at 4.75% then.