The Bank of England is forecast to lift interest rates for a 13th time in a row on Thursday – and may hike sharply to fight stubborn inflation despite such a move worsening a cost-of-living crisis.
The BoE had been expected to raise its key lending rate, which stands at 4.50 percent, by another quarter point to combat inflation that is the highest among G7 nations.
However, shock data on Wednesday showing UK inflation holding at 8.7 percent in May dashed hopes of a slowdown and sparked bets on a larger half-point hike.
Either move would bring the BoE rate to the highest level since the 2008 financial crisis and further dent economic activity.
A half-point hike would be in stark contrast to the Federal Reserve, which last week pressed pause on US rate hikes after a sharp easing in the country’s inflation.
The European Central Bank last week raised its borrowing costs by a quarter point.
The Swiss and Norwegian central banks hiked their rates on Thursday ahead of the BoE decision.
“It cannot be ruled out that additional rises in the Swiss National Bank policy rate will be necessary to ensure price stability over the medium term,” the SNB said in a statement announcing the rate was increased a quarter point to 1.75 percent.
Norway’s central bank raised its key rate for an 11th time since 2021 and hinted at another likely hike in August.
The bank said it was raising the rate by half a point to 3.75 percent.
– More aggressive hike? –
All eyes were now on the Bank of England.
“Up until yesterday… markets were predicting with a high degree of certainty that we would see a quarter-point rate hike from the Bank of England,” noted Michael Hewson, chief market analyst at CMC Markets UK.
“That certainty has now shifted.”
Hewson said it was now an even split on whether the BoE would go more aggressive with a half-point increase.
“As (UK) inflation readings go it’s a very worrying number and suggests that inflation is likely to take longer to come down than anticipated… (and) in contrast to its peers in the US and Europe where prices now appear to have plateaued.”
The latest UK inflation data dealt a major blow to British Prime Minister Rishi Sunak, who has made slashing the pace of price rises a priority for his Conservative government as it heads into a general election next year.