Traders bet next rate hike will be the last as pound hits 15-week low against the dollar

The pound hit a 15-week low against the dollar yesterday as traders bet that an expected interest rate hike this week will be the last.

Sterling dipped to as low as $1.2366 ahead of a Bank of England decision on Thursday which is widely forecast to see rates rise from 5.25 per cent to 5.5 per cent.

The currency could take a further hit if the Bank indicates at this week’s meeting of the Monetary Policy Committee (MPC) that the hiking is over.

‘Any hints on Thursday that the UK policy rate was something like “sufficiently restrictive” would most likely hit the pound,’ said ING Bank’s Chris Turner.

Economists at US investment bank Goldman Sachs said a pause in rate hikes as soon as this week may even be a ‘possibility’. 

But on balance they still expect to see the MPC go for another increase, the 15th in a row.

More likely, they suggest, is that the committee will ‘hold rates steady’ at the following meeting in November.

An end to rate rises could provide a glimmer of hope for borrowers battered by a series of hikes since December 2021 as the MPC battled to bring down inflation, which peaked at 11.1 per cent last autumn.

Higher interest rates already mean that millions of homeowners are facing steep rises in monthly repayments and business surveys suggest they could be pushing the UK towards recession.

Inflation, at 6.8 per cent, remains well above the Bank’s 2 per cent target and figures tomorrow are expected to show it climbed back above 7 per cent in August due to rising fuel prices.

Meanwhile, wages are still going up at record rates – another potential driver of inflation.

But Bank of England governor Andrew Bailey believes it is still heading for a ‘quite marked’ decline by the end of the year and declared earlier this month that rates were nearing the ‘top of the cycle’. 

And other data, such as shrinking GDP and rising unemployment, suggest the economy is cooling.

Financial markets yesterday priced in a more than 80 per cent chance that rates would rise again this week. 

But the chances of another increase in November are rated at only around 30 per cent. 

Goldman’s experts said the Bank will probably need clearer signs that that is the case before stopping interest rate hikes.

‘Looking ahead to the November meeting, we see a greater chance that sequential wage and price pressures will have cooled sufficiently to allow the MPC to go on hold,’ they said in a note to clients.

Economists at Citi, another US investment bank, also think this week’s expected hike will be the last.

But signs of a split among the nine-member MPC have already started to emerge.

Catherine Mann, the most hawkish member, warned last week that pausing interest rate hikes risked embedding high inflation in the economy, saying she would rather ‘err on the side of over-tightening’.

This week’s rates decision comes a day after the Bank’s counterparts at the US Federal Reserve announce their next move, with markets expecting a pause.