Bank of England chief Andrew Bailey said to curb rates
‘Overreaction’: Bank of England Governor Andrew Bailey
The Bank of England is under pressure to hit the pause button on interest rate hikes amid predictions that its own inflation forecast will be revised down to “near zero”.
Traders expect the bank to raise its benchmark base rate by another quarter of a percentage point to 5.25 percent this week, the 14th consecutive rise.
He raised the cost of borrowing 0.1 percent in December 2021 to rein in runaway prices, which soared after Russia’s invasion of Ukraine sent food and energy bills skyrocketing.
But now that inflation is slowing, more rate hikes are “increasingly difficult to justify,” according to Martin Beck, chief economic adviser at the EY Item Club, which uses the Treasury’s own forecast models.
“The Bank is too focused on the past,” he said. “All progress indicators are looking better.”
There are fears that Gov. Andrew Bailey, who has been criticized for letting inflation soar in the first place, may now go too far, plunging the economy into recession.
It emerged last week that most of Chancellor Jeremy Hunt’s economic advisers think the rate hike cycle should be slowed to avoid a fall.
Inflation remains at 7.9 percent, well above the Bank’s 2 percent target. But experts say a combination of higher interest rates, falling energy prices and a stronger pound means Bailey will unveil this week a downgrade of the bank’s own forecast and say inflation will fall below target. target by the end of next year.
Beck said: “The inflation forecast could be close to zero in two years.”
Markets expect interest rates to peak just below 6 percent early next year, down from what was forecast just a few weeks ago. As a result, the cost of fixed-rate mortgages, priced in line with these forecasts, has begun to decline.
Nationwide Building Society, HSBC, Barclays and TSB cut the cost of home loans last week by as much as 0.55 percentage point.
“Markets are saying inflation is coming down and base 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 relax 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 Monetary Policy Committee that sets rates.
‘Core inflation measures were only down slightly in the latest numbers. If I were in MPC now, I’d still be voting for a fare increase in August.’