Has the base rate peaked at 5.25%?
The Bank of England (BoE) has raised the base rate to 5.25 per cent, the highest level seen since 2008 and the hike will pile more pressure onto borrowers who are already facing huge price rises amid the cost of living crisis.
But the question everyone is asking now is when will they start falling?
Markets have started to price in a lower peak for borrowing costs after the Bank of England signalled that the cycle of interest rate increases could be nearing an end.
Despite the 14th consecutive rate rise since late 2021, traders seized on signs that the top of the rate cycle may be closer than previously expected. Markets are now pricing in a peak of about 5.75 per cent, having previously bet on rates rising above 6 per cent.
It came as the Bank signalled that rates will need to stay higher for longer to push inflation, which stood at 7.9 per cent in June, towards the Bank’s target of 2 per cent.
In a closely-watched change of wording, the Bank’s monetary policy committee said it would ensure that the base rate “is sufficiently restrictive for sufficiently long to return inflation to the 2 per cent target sustainably in the medium term”, suggesting that borrowing costs could remain above 5 per cent into 2025.
Andrew Bailey, governor of the Bank of England, said that “in order to get inflation back to target we are going to have to, in a sense, keep this stance of policy”. Bailey also signalled that the peak for borrowing costs may not be far off. The governor emphasised that “there is more than one path from here that delivers us back to the target”.
This could include the base rate remaining at 5.25 per cent.
The monetary policy committee was split three ways over what to do with borrowing costs this month. Six members, including Bailey, voted for a 0.25 percentage point rise while two members, Jonathan Haskel and Catherine Mann, were in favour of a bigger 0.5 percentage point increase. Swati Dhingra voted for the rate to be kept at 5 per cent.
Bailey is under significant pressure to bring down inflation, which hit a 41-year high of 11.1 per cent in October. While inflation has remained stubbornly high so far this year, a bigger than expected fall in June has raised hopes that the cycle of rate rises is having an effect. Bailey said: “The stance of monetary policy is restrictive, in our view. The evidence is now clear that it is having an impact.”
Economists at Nomura said the Bank’s description of its policy as “restrictive” suggested “on one interpretation at least, that we are approaching the end of the hiking cycle”.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, also said that although further rate rises were likely, “the peak level” for the base rate “is near”.
Source: Ben Martin, The Times (Friday August 04 2023)