Bank of England to raise rates by 25bps on August 4, but 50 a close call: Reuters poll

By Jonathan Cable

LONDON (Reuters) - The Bank of England (BoE) will likely shy away from a bigger interest rate rise in August and instead stick to the more modest 25 basis point increases it has been delivering, but it is a very close call, a Reuters poll of economists found.

The BoE is grappling with four-decade-high inflation, driven in large part by global pressures related to supply-chain disruptions and high energy prices. That has become a cost of living crisis, now pushing up the chances of recession.

Britain's central bank was the first among its major peers to begin hiking rates in the current cycle, lifting Bank Rate five times since December from its pandemic low of 0.10% to where it currently sits at 1.25%.

A slight majority in the July 13-25 Reuters poll - 29 of 54 economists - said the BoE will stick to 25 basis points at its next meeting on Aug. 4, to 1.50%. The remaining 25 forecast 50 basis points, which would put it more in line with its peers.

Among gilt-edged market makers, the narrow split was reversed. Of the 15 who responded, eight forecast a 50 basis point hike, while seven saw a 25 basis point hike.

(Graphic: Reuters poll- BoE monetary policy outlook, https://fingfx.thomsonreuters.com/gfx/polling/zjpqkzgzdpx/Reuters%20poll-%20BoE%20monetary%20policy%20outlook.png)

Last week the European Central Bank unexpectedly raised its key rates by 50 basis points, while the United States Federal Reserve hiked its main rate by 75 basis points last month and is expected to do so again on Wednesday.

Increased speculation the BoE might opt for a larger move was stoked by a recent speech from Governor Andrew Bailey, who said a half-point hike - which the central bank has never delivered since gaining independence in 1997 - was on the table.

"The continued record-high inflation will undoubtedly add pressure on the Bank to consider a 50 bp hike," said Bas van Geffen, senior macro strategist at Rabobank.

"However, it is doubtful that significantly higher rates will help to tame food and energy prices, and at the same time the UK is facing an anaemic growth outlook."

FINELY BALANCED

HSBC's Elizabeth Martins noted the change in their forecast to 50 from 25 on what she calls an "incredibly close" decision, reflecting recent commentary from Bailey as well as a view that conditions warrant more forceful action.

"Against this very finely balanced backdrop, we don't think a 50 bp move here is the BoE throwing in the towel on the relatively dovish approach it has taken thus far," Martins added.

"We still expect it to forecast a growth slowdown, a rise in unemployment, and a medium-term inflation rate of 1.3% - the biggest forecast undershoot since 2009," she wrote.

A majority of respondents expect Bank Rate to end the year at 2.25% or higher, compared with 1.75% in the previous poll.

Meanwhile, the economy is slowing.

The poll gave a median 55% chance of a recession in the coming year, up sharply from 35% in the June poll. But that was based on a small sample of 11 respondents, with several declining to answer as they thought the recession was already here.

About 30% economists saw at least two consecutive quarters of contraction, the textbook definition of recession, in their quarterly forecasts. Another 22% had at least two, just not consecutive quarters.

Britain's businesses grew at their slowest pace in 17 months in July and inflation pressures eased, according to an industry survey last week.

Other data showed consumers cut back on their shopping in June and consumer confidence remained at an all-time low.

The majority of respondents to an extra question, 11 of 18, said the current cost of living crisis would linger for over a year before it eased significantly.

The poll suggested inflation, currently at a 40-year high of 9.4%, would likely peak in the fourth quarter, when it is expected to average 10.2% - five times the BoE's 2% target.

(Graphic: Reuters poll- UK monetary policy outlook, https://fingfx.thomsonreuters.com/gfx/polling/gkvlgyzkepb/Reuters%20poll-%20UK%20monetary%20policy%20outlook%20juky.PNG)

Economic growth was seen averaging just 0.2% this quarter, following a 0.4% contraction last quarter, and then shrinking 0.1% next quarter before expanding just 0.1% in early 2023.

The economy was forecast to expand 3.4% this year and 0.6% next, less than the 3.7% and 1.2% given in a June poll.

(Polling by Vijayalakshmi Srinivasan, Milounee Purohit and Prerana Bhat; Editing by Ross Finley and David Holmes)