Bank of England to hike rates in just over two weeks, warn top international banks

The Bank of England will scale back the wave of stimulus it unleashed in response to the Covid-19 crisis in just over two weeks.

That’s the warning from two leading international banks, who both ratcheted up their expectations for the first rate hike in over three years today.

Wall Street giant Goldman Sachs brought forward its forecast for the Old Lady to hike interest rates as soon as November, and then again in February and May, bringing borrowing costs to 0.75 per cent.

Dutch international bank ING agreed with Goldman’s assessment, with James Smith, developed market economist, saying: “It’s a close call between a November and February move, but we suggest the former is more consistent with the Governor’s latest hints.”

The fresh bets sparked a selloff in short term government debt, sending yields to their highest level in two and a half years at 0.72 per cent.

An earlier than expected rate rise could railroad Chancellor Rishi Sunak’s preparation for next Wednesday’s budget. The Institute for Fiscal Studies estimates each additional one percentage rise in interest rates bulges the government’s interest bill by £10bn.

Earlier than expected rate hike forecasts have been triggered by governor Andrew Bailey tilting toward a much more hawkish position.

Speaking at an online panel discussion, he said yesterday the Bank will “have to act” to hose down runaway medium term inflation.

Bailey had also previously said officials on Threadneedle Street have a very “challenging job” to prevent inflation from becoming “embedded” in the British economy.

The Old Lady’s latest forecasts put inflation topping four per cent by the end of the year, over double its target. The Office for National Statistics releases latest official inflation estimates on Wednesday.

Based on Goldman’s modelling of inflation expectations in the UK, the bank thinks the “the BoE should act pre-emptively and decisively to concerns about knock-on effects from high inflation.”

Before the Bank’s September meeting, markets were pricing in just one rate hike BY next summer, but brought forward their bets to December this year at the beginning of last week. They now think rates will be around one per cent in September next year.