he contraction in the UK economy that was revealed this week likely rules out anything more than a small increase in interest rates as the Bank of England sets out its decision on Thursday, analysts have said.
It will now fall to the nine-person committee to decide what is the best outcome. These include Andrew Bailey, the Bank’s Governor, two deputy governors: Sir Jon Cunliffe and Ben Broadbent; but also Huw Pill, its chief economist.
“April’s GDP data … surely will mean that the internal block – Bailey, Broadbent and Pill – sticks to voting to raise Bank Rate by 0.25% this month,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
“And given that some members thought last month that the guidance regarding further rises in interest rates was obsolete, we expect to see at least one of them, most likely Cunliffe, to vote for no change.
“With markets currently pricing in a 34bp increase in Bank Rate this week and a further 41bp rise for the August meeting, we expect both rate expectations and sterling to drop in the wake of this week’s meeting.”
Laith Khalaf, head of investment analysis at AJ Bell, said: “The Bank of England faces a stern test of its mettle at the next interest rate decision, and any hesitation is likely to result in the pound being punished on the currency markets.”
However, some things have changed since then. The UK economy looks set to struggle, with an OECD forecast predicting it will be the weakest in the Group of Seven (G7) next year.
The Bank has been given a little more wriggle room by the Chancellor, who is set to funnel billions to struggling households to help them deal with soaring energy bills.
People are certainly expecting rises to come. According to a survey commissioned by the Bank of England and performed by Ipsos in early May, 70% of people expect rates to rise over the next 12 months.
The survey, released on Friday, showed that 28% thought a rate rise would benefit the economy, 22% said the same about a drop, and 28% want them to remain at current levels.
source: Evening Standard