Bank of England to add 50 bps to Bank Rate on December 15; peak at 4.25% in Q2

“The Bank of England will add another 50 basis points to Bank Rate next week and take borrowing costs to 3.50%, despite the economy falling into recession, as it battles inflation running at more than five times its target,” stated the latest survey from Reuters.

Key findings

One of the first major central banks to start unwinding the ultra loose policy adopted globally during the pandemic, the BoE went for a 75 bp lift last month but was expected to add a more modest 50 on Dec. 15 according to all but two of the 54 economists surveyed Dec. 5-7.

Only two economists expected a 75 bp increase next week compared to 13 of 56 in the Nov. 23 poll.

The U.S. Federal Reserve is also expected to shift down to a 50 bp move this month after four consecutive 75 bp increases, a separate Reuters poll found.

After next week's move, the BoE will add another 50 bps in the first quarter and 25 bps in the second, with medians showing Bank Rate peaking at 4.25% then. Forecasts for the terminal rate ranged from 3.50% to 4.75%.

In last month's survey, Bank Rate was expected to peak at 4.25% next quarter and there was a big divide between economists in the latest survey as to when and where it would level out.

Quarterly forecasts suggest the economy shrank 0.2% last quarter and will do so by 0.4% in this one, meeting the technical definition of recession. It will then contract 0.4%, 0.4% and 0.2% in the first three quarters of next year.

A majority of respondents to another question said the recession would be long and shallow.

Those forecasts were little changed from last month but when asked about the risks to their GDP forecasts, 12 of 18 said it was to the downside. Across this year the economy was predicted to expand 4.4% but then contract 0.9% next year before returning to 0.9% growth in 2024.

Inflation was seen peaking at 10.9% this quarter, higher than the 10.7% estimate given last month before drifting down. However, it won't reach the Bank's 2.0% goal until the third quarter of 2024.

Also read: GBP/USD eyes more gains above 1.2250 amid upbeat market mood, UK GDP eyed

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