UK interest rates will peak at 5.5% next month as Bank of England policymakers try to minimise the impact of higher borrowing costs on the UK economy and avoid a prolonged recession, economists predict.
A fresh poll of economists by Reuters suggests the Bank will approve a 15th consecutive increase in interest rates at its next meeting on 21 September as part of efforts to combat price inflation, which is still more than three times higher than its 2% target.
All but one of the 62 economists surveyed said they expected the Bank’s base rate to rise by a quarter of a percentage point next month, taking rates from 5.25% to 5.5%. The only outlier expected a half-point hike, which would take rates to 6%.
The Bank has been raising rates at a clip in an effort to lower surging inflation, which peaked at 11.1% last October and has since eased to 6.8% in July.
The Reuters poll shows that economists expect inflation to average at 6.8% this quarter, before falling to 4.7% in the fourth quarter. It is not forecast to drop below the 2% target until at least 2025.
However, policymakers must consider the consequences of further rate hikes. Higher borrowing costs have weighed on the housing market – as consumers avoid costlier mortgages – and private sector activity across the UK.
The latest monthly business health checks, known as the purchasing managers’ index (PMI), showed weakness in the UK services and manufacturing sectors and the poorest performance for both industries since the Covid lockdown in early 2021. Companies said they had struggled amid Britain’s cost of living crisis, lower export demand, fears over the economic outlook, and higher interest rates. It has led some experts to predict the UK will slip into recession in the third quarter.
“The August [Bank] meeting began to lay the ground for a pause,” said James Smith, a developed markets economist at ING. “I think the fact [that] the Bank is now finally admitting [its] policy is restrictive […] it is now a turning process to convince markets [that] rates are going to stay high for quite some time.
“It comes down to the data,” he added. “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.”
