Bank of England set for biggest rate hike in 27 years as inflation soars

LONDON — The Bank of England on Thursday is broadly expected to hike interest rates by 50 basis points, its largest single increase since 1995.

Such a move would take borrowing costs to 1.75% as the central bank battles soaring inflation and would be the first half-point hike since it was made independent from the British government in 1997.

U.K. inflation hit a new 40-year high of 9.4% in June as food and energy prices continued to surge, deepening the country’s historic cost-of-living crisis.

Bank of England Governor Andrew Bailey suggested in a hawkish speech on July 19 that the Monetary Policy Committee could consider a 50 basis point hike, vowing that there would be “no ifs or buts” in the Bank’s commitment to returning inflation to its 2% target.

A Reuters poll taken over the past week indicated that over 70% of market participants now anticipate a half-point rise.

James Smith, developed markets economist at ING, said that although the economic data since June’s 25 basis point hike had not moved the needle significantly, the MPC’s prior commitment to act “forcefully” to bring inflation down, and the market more-or-less pricing in 50 basis points at this stage, means policymakers are likely to err on the aggressive side.

“Even so, the window for further rate hikes feels like it’s closing. Markets have already pared back expectations for ‘peak’ Bank Rate from 3.5% to 2.9%, though that still implies two further 50bp rate hikes by December, plus a little more thereafter,” Smith said.

“That still feels like a stretch. We’ve been penciling in a peak for Bank Rate at 2% (1.25% currently), which would mean just one more 25bp rate hike in September before policymakers stop tightening.”

He acknowledged that, in practice, this might be an underestimate, and depending on the signal the Bank sends on Thursday, ING wouldn’t rule out an additional 25bps or at most 50ps worth of hikes beyond that.

Smith said the key points to watch out for in Thursday’s report would be whether the Bank continues to use the word “forcefully,” and its forecasts, which plug market expectations into the Bank’s models and expected policy trajectory.

Should the forecasts indicate, as in previous iterations, an acceleration of unemployment and inflation well below target in two to three years’ time, markets could deduce a more dovish message.

“Everybody takes that as a sign of them saying ‘okay, well if we were to follow through with what markets are expecting, then inflation is going to be below target,’ which is their very indirect way of saying ‘we don’t need to hike as aggressively as markets expect,'” Smith told CNBC on Tuesday.

“I think that will be repeated, I would expect, and that should be taken as a bit of a sign maybe that we’re nearing the end of the tightening cycle.”

Growth worries

A more aggressive…