Will base rate peak this week? BoE set to hike to 4% on Super Thursday

The Bank of England is expected to add 0.5 per cent to the base rate on Thursday in what some analysts are predicting will be the penultimate rise in the bank’s hiking cycle.

The BoE’s latest move will follow the US Federal Reserve on Wednesday and coincide with the European Central Bank on what has been dubbed ‘Super Thursday’, as policymakers tentatively approach the conclusion of their fight against inflation.

A 50 basis points hike would take base rate from 3.5 per cent to 4 per cent. The widespread market view is that there will be a final jump of 25bps to 4.25 per cent in March.

Analysts suggest the base rate will peak at 4.25% next month

OBR forecasts have consistently underestimated inflation, but there is confidence that November marked the peak   

The BoE’s Monetary Policy Committee will be forced to weigh mixed signals from UK economic data when making a decision on rates this week.

On one hand, consensus suggests inflation peaked in November and is falling, while a sharp fall in gas prices – a key driver of inflation over the last year – should feed through into retail prices this year.

However, the MPC could be forced into a more hawkish stance by better-than-expected economic activity in the final quarter of 2022, a stubbornly tight labour market and concerns that UK core inflation may prove ‘stickier’ than elsewhere in the world.

Its decision will be accompanied by the latest Monetary Policy Report, which should give further insight into how the MPC evaluates recent data and how that may affect the course of the hiking cycle.

Analysts at UBS said: ‘We continue to expect that after a 50bps hike on 2 February, the BoE will deliver one more 25bps rate hike on 23 March, bringing Bank Rate to 4.25 per cent.

‘We view the risk to our call as balanced and dependent on incoming inflation and labour market data and inflation expectations.’

The key drivers of inflation have begun to recede   

UBS added that the ‘tone’ of the MPC report will be in focus to gauge the outlook for the BoE’s hiking cycle.

It said: ‘While we expect the MPC to keep the guidance that “further increases in Bank Rate might be required”, we will be closely watching for signals that the Committee is getting closer to the end of the hiking cycle.’

Markets suggest the BoE is not alone in approaching the end of its hiking cycle.

The US Federal Reserve is widely expected to hike 25bps to a rate range of 4.5 to 4.75 per cent, while the ECB is forecast to hike by 50bps.

Collectively this means global interest rates will hit a 15-year high.

ING analysts said: ‘The BoE looks more likely to follow the ECB than the Fed… and we expect a 50 basis point rate hike for the second consecutive meeting.

‘While the minutes of the December meeting appeared to open the door to a potential downshift to a 25bp move in February – and this meeting looks like a closer call than markets are pricing – the reality is that the recent data has looked relatively hawkish.

‘Wage growth is persistently high, looking both at the official numbers and the BoE’s own business surveys. Headline inflation came in a little lower than the Bank projected back in November, but services CPI – seen as a better gauge of domestically-driven inflation – has come in above expectations.

‘Still, if we get a 50bps hike on Thursday then it’s likely to be the last.’

ING expects ‘one final’ 25bps hike in March, with UK interest rates peaking at 4.25 per cent.

Peder Beck-Friis, portfolio manager at PIMCO, also expects a 50bps BoE hike on Thursday.

He said: ‘Headline inflation is falling and likely peaked in November. But core inflation remains high and wages are accelerating.

‘The labour market remains tight, with unemployment low. Labour demand has started to fall, albeit gradually. Unlike in most other developed market countries, labour supply remains stubbornly weak.

‘As the policy rate increases further into restrictive territory, we think the Bank of England will pause its tightening in the first half of the year. We expect the policy rate to peak somewhere between the ECB and the Fed.’

UK companies inflation expectations over one and three years show a believe that inflation will fall but not as far as the 2% target