The Bank of England is expected to raise interest rates for a 10th consecutive time on Thursday as policymakers continue to fight inflationary pressures amid expectations for a sharp slowdown in the British economy this year.
Although inflation in Britain may have peaked late last year, it remains stubbornly high, at an annual rate of 10.5 percent in December. Policymakers are worried about rising prices in the services sector and the inflationary effect of high levels of people not working or looking for jobs.
Most analysts expect the central bank to raise its interest rate by half a percentage point to 4 percent, the highest since 2008, though a notable minority say that policymakers will opt for a smaller increase.
The bank’s rate-setting committee will “deliver a final ‘forceful’ hike” of half a percentage point, analysts at Barclays wrote in a note this week. Since the last rate increase in December, the economy has fared slightly better than expected but there have also been signs of persistent inflation, they wrote.
Britain’s work force hasn’t returned to its prepandemic size, with half a million more people counting as economically inactive since February 2020. Amid a tight labor market, wages are rising at a steady clip. Though the wage growth isn’t fast enough to keep up with inflation, and household budgets are tightly squeezed, policymakers are concerned that wage growth could embed inflationary pressures deeper into the economy. That would make it hard to sustainably return inflation to the central bank’s 2 percent target.
The bank is expected to maintain its relatively aggressive stance on Thursday but after more than a year of raising interest rates, analysts are looking for signals about when the bank will halt this tightening cycle. On Wednesday, the Federal Reserve raised rates by a quarter of a point, a smaller move than recent increases, but signaled more rate moves in the coming months.
In December, two members of the Bank of England’s nine-person rate-setting committee voted to hold interest rates steady, arguing that higher interest rates were already tightening financial conditions, and that the weakness in the economy from incomes lagging far behind inflation was a reason to stop.
Earlier this week, the International Monetary Fund downgraded its forecast for the British economy, predicting a 0.6 percent contraction in 2023, instead of the 0.3 percent expansion it forecast last October. While many economists have predicted that Britain will experience a recession this year after a stronger-than-expected 2022, the I.M.F. forecast stands out because it has upgraded its expectations for global growth and presented Britain as an outlier.
In Britain, the overall rate of inflation is expected to fall sharply later this year, but the impact of lost purchasing power is predicted to further slow consumer spending, which is usually a key engine of economic growth. Higher interest rates also mean that millions of households face a sharp increase in mortgage costs this year as their fixed-rate loans end, worsening the squeeze on household budgets.
The central bank will publish new forecasts for economic growth and inflation later on Thursday.