UK Interest Rate Hike Hits 16-Year High... Market Says "Final Increase"

The Bank of England (BOE) is expected to implement another baby step (a 0.25 percentage point increase in the base interest rate) at this week's monetary policy meeting. In this case, the base interest rate in the UK will rise to 5.5% per annum, the highest level in 16 years. The BOE has shown an aggressive rate hike stance 14 times so far, and the market is placing weight on the possibility that this will be the last increase.

According to a survey of major foreign media on the 17th (local time), 64 out of 65 economists expect the BOE to raise the base interest rate by 0.25 percentage points at the monetary policy meeting on the 21st. If the BOE decides on a baby step, the UK's base interest rate will rise from 5.25% to 5.50%. This is the highest level in 16 years since 2007.

UK inflation remains at a high level compared to other major advanced countries. Many experts expect the UK's August Consumer Price Index (CPI), to be released a day before the BOE monetary policy meeting, to rebound from the recent downward trend due to the impact of rising energy prices. The UK's July CPI was 6.8%, continuing the downward trend following May (8.7%) and June (7.9%).

Andrew Bailey, Governor of the BOE.
Photo by Reuters Yonhap News

However, within the BOE, concerns about the economic outlook have begun to outweigh worries about inflation. Since December 2021, when the BOE was the first among major European countries to tighten monetary policy, it has continued tightening without a break for over 1 year and 9 months. At that time, the interest rate was at an all-time low (0.1%).

One foreign media outlet pointed out, "Both the rapid rate hike periods in the 1970s and 1980s were accompanied by severe recessions, and with the effects of the 14 aggressive rate hikes since last year not yet reflected in the real economy, the BOE is increasingly cautious about the risk of an accelerating economic downturn." The BOE has decided to temporarily pause rate hikes to assess the impact of the aggressive tightening so far on inflation, the labor market, and economic growth.

Andrew Bailey, Governor of the BOE, said, "(Based on key data released last week) the BOE is much closer to ending the tightening cycle this month." The July unemployment rate rose by 0.1 percentage points to 4.3% compared to the previous month, indicating that the overheated labor market is regaining balance, which also supports expectations for the end of tightening.

The market also expects the tightening phase to end with the 15th consecutive rate hike this week. Jack Meaning, Chief Economist at Barclays, said, "This baby step is likely to be the last increase this year," adding, "A 0.25 percentage point hike is strongly anticipated."

This content was produced with the assistance of AI translation services.