Hiking fast and slow: how quickly will the Bank of England raise rates?

All eyes are on the Bank of England ahead of a critical meeting tomorrow to decide how big the inevitable hike in interest rates will be.

The Bank is expected to up the current rate of 0.75% by a quarter of a percentage point, despite economists saying it should move faster to curb rampant inflation, currently at a 30-year high.

In the US, the Federal Reserve signalled a more aggressive 0.5 percentage point rise earlier today. US interest rates are likely to exceed 3% by early 2023. 

The move came despite the US economy unexpectedly shrinking at an annualised rate of 1.4% in the first three months of 2022, largely owing to supply chain disruptions. The US trade deficit in goods reached a record high last month, triggered by the war in Ukraine and China’s lockdowns. 

That being said, consumer spending – the engine of the US economy – is yet to be hit, and actually rose at an annual rate of 2.7% in the first quarter, up from the end of last year.

How does this compare with the situation in Britain?

In the UK, inflation is running at 7% and is set to reach almost four times the central bank’s 2% target in the coming months. 

Consumers in the UK – and Europe – have been harder hit by the energy crisis than in the US. And unlike in the States, we’re already witnessing inflation eroding purchasing power over here. UK retail sales dropped by an unexpected 1.4% in March, as households cut down on spending amid rising prices and tax hikes. 

The PM reiterated on Tuesday that the risk of an “inflationary spiral” limits how much support the government can offer to those seeing their energy bills more than double. 

With all these factors at play, the Bank of England’s Monetary Policy Committee will announce its decision tomorrow lunchtime on whether or not to raise interest rates again – and if so, by how much. 

Julian Jessop, an economist and Fellow at the IEA, is in favour of doubling the pace of the rise to 0.5%. He says fears about the impact on the cost of mortgages shouldn’t deter the Bank. Most mortgages are on fixed rates, meaning people wouldn’t see an increase for several years. What’s more, “higher rates are already priced into the mortgage market.” 

The counter to this view is that uncertainty about the state of economic growth later in the year makes a modest quarter-point rise the better bet. Plus, the squeeze on real incomes could also help drag inflation down. 

Even if the Committee opts for the lower increase, this would still take the rate to its highest since the financial crisis. It will also be the first time in its 25 years of independence that the Bank has raised rates at four consecutive committee meetings. Let’s see what the Old Lady of Threadneedle Street pulls out of her bag.