December 4, 2022
Tea

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US-style, super-sized rate hikes arriving in the UK this week have set the tone for business in the city and fueled speculation that the Bank of England may be speeding up its fight against inflation. May when its meeting is held this week.

The results of the September meeting of the Monetary Policy Committee will be announced on Thursday at noon. It will follow the Federal Reserve’s rate call in the US on Wednesday, on which some city experts predict an increase of 1%.

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Ahead of the MPC’s vote, speculation has mounted that policymakers in London will follow a pattern already firmly established in Washington, by raising base rates by 0.75%, having voted for a 0.50% increase last month, twice the normal step.

UK rates have already risen six times since December, reaching 1.75%. The August rise was the biggest in nearly 30 years, and with global central banks ramping up their fight against inflation with increased use of monetary policy firepower, talk of even bigger action is pouring in from Threadneedle Street this month.

With the pound in sadness – it touched its lowest level since the mid-1980s at just under $1.14 last week – and the official BoE forecast expects inflation to rise above 13% this year, pressing for action. Growing, even the economy is slowing down.

James Smith, a developed market economist at Dutch bank ING, said a 0.75% increase from the BoE is “clearly on the table” and that investors should “expect at least some policymakers to vote for it.”

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He described the meeting as “important”, saying: “It will not only tell us how concerned policymakers are about the decline in sterling and other UK markets, but it will also show the government’s intention to limit domestic/commercial energy prices.” How will the decision translate into monetary policy.”

Stephen Gallo, European head of FX strategy at the Bank of Montreal, expects 0.75% of the vote; “We think anything less and no mention of currency market volatility will be a clear indication to the FX market that the BoE prefers a weaker pound,” he said.

A busy week of action at European central banks could add to the pressure on the BoE. Sweden’s Riksbank voted on Tuesday for the biggest rate hike in the Scandinavian country in a decade, up 1% to 1.75%. Swiss National Bank and Norway’s Norges Bank are also due to make announcements this week.

Russ Mold, investment director at AJ Bell, said: “Financial markets hang on to central bankers’ every word, and this is because the direction of interest rates is seen as important by investors between different asset classes, such as bonds. How do you allocate your capital, shares, assets, commodities and cash?

ING’s James Smith predicted a 0.50% increase at the BOE meeting which is “undoubtedly close to the call”, and points to the possibility of the first three-way split in votes since 2008 if more members of the MPC, Silvana Tenrero, remains in line for a 0.25% increase with her August votes.