Cost-of-living crisis: Interest rates set to rise for fourth time this year

Economists have pencilled in a further rise in interest rates this week, but the Bank of England is also expected to dampen fears over the extent of further hikes.

The Bank of England's monetary policy committee could this week hike interest rates for the fourth time this year.

Rates are expected to increase for the fourth time this year to 1 per cent from 0.75 per cent currently when the monetary policy committee (MPC) meets on Thursday.

However Martin Beck, chief economic advisor to the EY Item Club, said recent comments by MPC members have put more emphasis on the prospect of economic slowdown and recession.

“Signals around further interest rate increases are likely to become more cautious,” he predicted.

Beck said recent developments including a rise in CPI inflation to 7 per cent and a continuing tight labour market have given the MPC some reasons to justify higher interest rates.

“However, the extent to which labour market tightness is feeding into bigger pay rises, a key concern for the MPC, is still unclear. Although headline pay growth picked up in February, that was largely due to the volatile bonus component. Regular pay growth has been much softer and well below inflation. And other pay indicators have been mixed,” he pointed out.

ING’s developed markets economist James Smith, who believes a rate hike this week “looks like a near certainty”, said he would also be watching out for signs of the committee becoming more divided.

“We suspect the vote split will be 8-1 again in favour of a hike, but if the dissent becomes more widespread than that would be another hint to markets that the rate hike cycle could be nearing a pause,” he said.

Smith highlighted comments made by Bank of England governor Andrew Bailey recently that it is walking a narrow path between growth and inflation.

“Even before the war in Ukraine, the Bank was expecting persistently high inflation but a bleak growth outlook. New forecasts due next week are likely to show that this trade-off has only magnified since,” said Smith.

“The net result is likely to be an inflation forecast that peaks around 9 per cent in April and stays not far below that throughout 2022, and an economic outlook that features at least one-quarter of negative growth this year.”

The US Federal Reserve will also announce its latest decision on rates this week.

Russ Mould, AJ Bell’s investment director said after it raised rates by a one-quarter point to 0.5 per cent back in March, markets reckon a half-point hike to 1 per cent is “nailed on”.

“This may also be the meeting where Fed chair Jay Powell outlines the American central bank’s plans for quantitative tightening, as it seeks to tighten monetary policy in another way and curb the stimulus it has liberally applied since the financial crisis,” said Mould

“Powell has hinted at a rate of withdrawal of some $95 billion (£76bn) a month. The Fed’s balance sheet assets currently stand at $9 trillion, so even at that rate it will take just over four years to sterilise the $5 trillion in QE stimulus added since the start of the pandemic.”