The Bank of England is expected to raise interest rates for the tenth consecutive time later this week.
Financial markets are forecasting a 0.5 percentage point hike in the central bank’s base rate to 4 percent, the highest since the 2008 financial crisis.
Thursday’s announcement comes at a difficult time for mortgage holders and businesses, following nine consecutive rate hikes by the bank’s monetary policy committee (MPC) since December 2021.
The decision would put even more strain on already-stressed borrowers, but as inflation begins to descend from its peak, economists say there is a glimmer of hope for the economy’s more distant future.
Economists polled by Reuters predict another rate hike — to 4.25 percent in March — while financial markets believe the tightening cycle will end at 4.5 percent by the middle of this year.
The Bank has been raising rates consecutively for more than a year. In December 2021, the base rate stood at just 0.1% as policymakers tried to encourage consumer spending after Covid slowed the economy.
But efforts to contain inflation and bring it back to the bank’s target of 2% have led the bank to tighten monetary policy ever since.
However, UK consumer price index (CPI) inflation fell slightly to 10.5% in December from 10.7% in November and 11.1% in October, suggesting that the measure has now passed its peak.
Deutsche Bank suggested that Thursday would be the last “powerful” increase in the MPC in the tightening cycle with an increase of 0.5 percentage points.
The need to “go big” is because of several factors, including that wage growth has beaten expectations, indicating that consumers still have some purchasing power and that prices are still historically high, Deutsche said.
Société Générale Global Economics suggested the same, but said it expects another 0.5 percentage point increase in March before falling again.
SocGen’s economists said: “While the outlook is less bleak than expected three months ago, we still think a recession is likely and the MPC’s forecasts should continue to predict one for this year.
“This, and mounting evidence of some cooling in the labor market, particularly job vacancies and job growth, should lead the committee to consider an early end to tightening.”
Investec Economics, on the other hand, expected a smaller rate hike to 3.75% on Thursday, peaking at 4% in March.
“The past few weeks have led to a heightened sense of economic optimism,” said Philip Shaw, chief economist at Investec.
“This is partly due to the mild European winter, which helped avoid energy rationing, contributing to a substantial decline in current spot gas prices and gas price futures.
“In the UK, we are heading into another year in which real household disposable income will fall by around 3%, which will continue to depress spending and make a recession all but inevitable.”
AJ Bell analyst Laith Khalaf said a lot has changed since the last MPC meeting, including the fall in gas prices, which will make the committee “think twice about pushing rates up too much.”
The news comes as households come under increasing pressure from tariff increases.
As many as 2.7 million homeowners with short-term, fixed-rate mortgages are expected to pay at least £100 more per month to refinance their loans at higher rates.