Will the Bank of England hike interest rates this week?

Banking sector turmoil has dampened expectations of a Bank of England interest rate hike this week, as investors weigh the possibility that the bank will instead opt for a pause.

Prior to last week markets had embraced the likelihood of a BoE base rate hike of 25 basis points, adding 0.25 per cent to take the benchmark rate to 4.25 per cent.

But the collapse of Silicon Valley Bank, broader problems within regional US banks and the emergency takeover of Credit Suisse could lead the Monetary Policy Committee to hold off when it meets on Thursday.

Central banks globally will now be concerned that economies will be more sensitive to interest rate hikes and may not want to risk falling back into a recessionary outlook and further market chaos – even as inflation remains well above targets.

The Bank of England’s MPC will make a decision on interest rates on Thursday 

The BoE has hiked the base rate to 4% so far this cycle

The BoE has hiked the base rate to 4% so far this cycle 

A key factor for the BoE will be fresh inflation data due from the Office for National Statistics on Wednesday, having previously been encouraged by improved economic growth forecasts, falling energy and commodity prices, and softening wage growth and services inflation.

Consumer Price Inflation fell to 10.1 per cent in January, driving confidence that the interest rate hiking cycle was having the desired effect. The Office for Budget Responsibility now expects inflation to fall back to 2.9 per cent by year-end.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: ‘A week ago a rate rise seemed nailed-on, but the woes of a handful of banks have loosened convictions considerably.’

A week ago a rate rise seemed nailed-on 

However, Streeter added that systemic risk to the banking sector ‘is still considered to be low’ as larger banks have bigger capital buffers and stable deposits, while central banks have also said they ‘will use all tools available to limit potential contagion and further financial instability’.

Nevertheless, bank stocks across Europe fell sharply again on Monday, with the FTSE 350 banking index down by as much as 3 per cent in early trading.

She said: ‘The Bank could go either way on whether to raise or pause again. However, even if it chooses to wait for the dust to settle, this may not be the last of the rate rises.’

James Lynch, fixed income investment manager at Aegon Asset Management, expects a pause. He said that softer-than-expected private sector wages and services inflation alone ‘could have been enough to halt the rate rises’.

He added: ‘However, up to the point of the SVB collapse, the market had been pricing in another 90bps of additional hikes this year. 

‘The reason has been slightly better economic growth and the market had been following the rise of US and Eurozone rate paths. All has changed since the US regional bank issues.

‘One argument that has been taking place in central bank circles is over the sensitivity of the economies to higher rates and the “long and variable lags” – for the past week at least, the pendulum has swung in favour of those who have a more cautious approach to monetary policy.

 ‘For this reason, we think the BoE will not raise interest rates this week.’

The Office for Budget responsibility now expects CPI to fall back to 2.9% by year-end

The Office for Budget responsibility now expects CPI to fall back to 2.9% by year-end

However, ING analysts still expect the BoE to opt for one more hike on Thursday before then pausing.

They said: ‘One thing that’s clear from recent communications is that the bar for pausing rate hikes is much lower at the BoE than at the European Central Bank. Policymakers have been clear that most of the impact of past hikes is still to hit, which is partly a function of the low prevalence of variable rate mortgages in the UK.

‘We suspect that the philosophy of at least trying to separate inflation fighting and financial stability still prevails today, and this was also a line adopted by ECB President Christine Lagarde in her most recent press conference.

‘In short, the meeting is on a knife edge and to a large extent it will come down to whether stability in financial markets starts to return.

‘A calmer financial market backdrop would keep a 25bp hike on the table. Further volatility could easily see a ‘no change’ decision, with non-committal guidance that further hikes could be enacted if the situation changes.’

Traders are slashing expectations of the Fed's hiking cycle, as this BlackRock chart shows

Traders are slashing expectations of the Fed’s hiking cycle, as this BlackRock chart shows

Internationally, the ECB committed to another interest week last week but expectations of another US Federal Reserve hike have also fallen sharply.

Futures markets now only see a one-in-three chance that the Fed will go ahead with a final rate hike this Wednesday and also now foresee rate cuts of as much as 1 percentage point by the end of 2023.

BlackRock Investment Institute said in a note on Monday: ‘We have argued that bringing inflation down would be costly, creating economic damage and cracks in the financial system.

‘This week’s events will crimp bank lending, reinforcing our recession view. As the cracks emerged, market expectations for peak rates plummeted/ The reason: hopes that central banks will come to the rescue and cut rates, as they did in the past.

‘That’s the old playbook – and it no longer works. Central banks are set to keep fighting stubbornly higher inflation, and use other tools to safeguard financial stability. Case in point: The European Central Bank raised rates by [50bps] last week. And we see the Fed raising rates this week.

‘Our conclusion: Investors need a new investment playbook and to stay nimble in this new market regime.’

From pensions to the economy, what the Budget means for you 

The headline act in the Budget was a major shake-up of pension saving rules, removing restrictions that limit the amount that can go in without tax penalties.

A bung for the rich or a move that will help many more young professional savers aspire to a decent retirement? 

Also in the Budget was news on the economy, a ray of hope on energy bills , and a big expansion of 30 hours free childcare. 

The podcast team delve into the Budget and joining them to explain the pensions element is a special guest, This is Money’s retirement columnist and ex-pensions minister Steve Webb. 

Press play to listen on the player above, or listen at Apple Podcasts,  Audioboom, YouTube and Spotify or visit our This is Money Podcast page.  

Read more at DailyMail.co.uk