By Shaloo Shrivastava and Jonathan Cable
BENGALURU/LONDON (Reuters) – The Bank of England is now marginally predicted to make only one more increase to Bank Rate, taking it to 5.50% on Sept 21, though a significant minority of economists polled by Reuters still expect rates to go even higher this year.
While other major central banks have either indicated – or already made – a stop to hiking, the BoE’s struggle to control inflation is still in play despite of 14 consecutive rate hikes.
Headline UK inflation dropped to 6.8% in July from 7.9% in June but is still over three times the BoE’s 2% target and one rates of the highest in Western Europe.
Core inflation, which excludes energy and food prices and a key measure of price growth closely monitored by the BoE, remained stickier.
Despite that, the latest Reuters poll narrowly showed Bank Rate peaking at 5.50%, down from 5.75% predicted in July.
“The August meeting began to lay the ground for a pause. I think the fact the Bank is now finally admitting policy is restrictive that it is now a turning process to convince markets rates are going to stay high for quite some time,” said James Smith at ING.
“It comes down to the data. Ideally they would like to stop hiking given rates are restrictive… By November the Federal Reserve will be done hiking and potentially also the European Central Bank, so it is a risk being seen as the last hawk standing somewhat unnecessarily.”
However, 88% or 22 of 25 who answered an additional question said the bigger risk to their terminal rate forecast was it would be higher than they predicted, while the remaining three said it would be lower.
All but one of 62 economists in the Aug. 16-23 poll expected Bank Rate to go up 25 basis points to 5.50% next month. One expected a half-point hike.
Despite inflation staying high, poll medians showed that as the final lift in a more dovish view than financial market expectations for 5.75% or higher by year-end.
The medians showed Bank Rate remaining on hold after September’s hike until Q3 next year, though a significant minority – 47% or 29 of 62 economists – estimated a higher peak.
While 27 predicted a peak of 5.75%, two said 6.00%.
That is a flip from a July poll when a slim majority, 51% or 31 of 61 participants, predicted Bank Rate at 5.75% or more by year-end.
Gilt-edged market makers (GEMMs) who participated in the poll were almost evenly divided on the peak. Eight of 15 said 5.50% while seven said 5.75%.
Among the 48 contributors who participated in both this and the July poll, nine reduced their peak rate by a quarter-point or more and of these, five were GEMMs.
Two contributors increased by a quarter-point and the remaining 37 kept predictions unchanged.
The wider poll showed inflation averaging 6.8% and 4.7% this quarter and next. Inflation was not expected to fall below 2% until at least 2025.
When asked if inflation would fall to the BoE’s target without a recession, 16 economists who answered were equally divided between “likely” and “unlikely”.
Britain’s economy could shrink this quarter and risks falling into a recession, as a purchasing managers’ survey on Wednesday showed a slump in factory output and broader weakness in the face of higher interest rates.
“PMIs are perhaps a stark reminder that bringing inflation down from double-digits to just 2% was never likely to be pain free. At face value, they suggest the risk of recession is growing,” noted Simon Wells at HSBC.
The economy has been grappling with high inflation and borrowing costs but has so far managed to skirt recession. Average growth was expected at 0.3% and 0.5% this year and next.
(For other stories from the Reuters global economic poll:)
(Reporting by Shaloo Shrivastava and Jonathan Cable; Polling by Mumal Rathore, Rahul Trivedi and Purujit Arun; Editing by Ross Finley and John Stonestreet)
