While policymakers appear split on how much tightening should be done to tame double-digit inflation as the economy heads into recession, the Bank of England seems set to raise interest rates to 3.5% or higher next week.
Investors had expected interest rates to reach 5.25% by mid-2023 before last month’s meeting, when BoE Governor Andrew Bailey predicted further rate increases would likely be needed.
A slight increase in interest rates in November would have been the first in over 30 years. However, two policymakers warned that such a move would trigger an unnecessarily severe recession.
There is currently a 78% chance that the BoE will raise rates by half a percentage point to 3.5% on Dec. 15. There is a 22% chance of a rise to 3.75%.
As a result, the BoE is deeply concerned about British consumer price inflation, which increased to 11.1% in October from 4.2% a year earlier, the highest since 1981.
It has been driven primarily by higher energy prices following Russia’s invasion of Ukraine, but the BoE is concerned that the COVID-19 pandemic and Brexit could further slow inflation.
“To our minds, another 50 basis point increase looks likely,” Investec economist Philip Shaw said.
“The BoE has made it pretty clear that inflation is too high. It’s concerned about the tightness of the labour market. And there are big risks to its projections.”
The energy price shock has forced Britons to accept lower living standards, but trade unions are taking industrial action to limit the damage.