Bank Of England Weighs Up Ending Its Rate Hike Run

The Bank of England must decide next week whether to halt its long run of interest rate hikes or push them up again, probably for one last time, despite investor alarm over how banks in the United States and Europe are coping with higher borrowing costs.

The BoE signalled in February that it was getting close to a pause and most economists polled this week by Reuters said it would probably opt for an 11th straight rate hike on Thursday, representing the end of a tightening cycle begun in late 2021.

A 25 basis-point rise would take Bank Rate to 4.25%, where most economists said it would stay for at least a year.

But investors have turned more doubtful about the BoE's appetite for more rate hikes in recent days amid mounting anxieties about the global banking sector.

Interest rate futures on Friday showed traders were putting a roughly 50-50 chance on the BoE maintaining Bank Rate at 4% next week. A week ago a pause was given only a 10% chance.

Since then, U.S. lender Silicon Valley Bank collapsed, Credit Suisse's share price plunge forced the Swiss central bank to pump in emergency liquidity and on Thursday, big U.S. banks injected funds into First Republic Bank.

Economists at Investec said the turmoil in markets had led them to change their call for the BoE's decision to no change.

"To our judgement a pause seems to be the most likely outturn, although that does not necessarily imply that tightening has finished," they said in a note to clients.

The BoE was the first major central bank to starting raising rates in December 2021 and it could be the second to halt the run after the Bank of Canada earlier this month.

In February, the BoE dropped language it previously used to show it was ready to keep raising rates sharply.

British inflation is set to fall this year after hitting a 41-year high of 11.1% in October, there have been signs of a slowdown in pay growth and the economy is expected to shrink in 2023 even if there have been some signs of a recovery.

"TOUCH AND GO"

Analysts at RBC Capital Markets said they still thought BoE Governor Andrew Bailey and his colleagues would raise rates one more time next week, by 25 basis points, after the European Central Bank pushed up its key rates by half a percentage point on Thursday, despite the financial sector upheaval.

"The decision at the meeting will be touch and go, however, and dependent on financial markets continuing to stabilise between now and next week's policy meeting," they said.

Investors expect a 25 basis-point rate hike from the U.S. Federal Reserve on Wednesday, a day before the BoE's announcement.

Forty-two of 47 economists polled by Reuters between March 13-16 expected the BoE to announce a 25 basis-point hike, hold Bank Rate at 4.25% for at least year and then lower it.

The poll also showed inflation, which stood at 10.1% in January, more than five times the BoE's goal of 2%, was predicted to average 6.6% in 2023 and 2.4% in 2024. February's official inflation data is due on Wednesday.

Gross domestic product was expected to shrink by 0.5% in 2023 - with a recession seen stretching over the first three quarters of this year - before expanding by 0.8% next year.

Most responses to the poll were submitted before Wednesday's budget statement by finance minister Jeremy Hunt, who announced around 20 billion pounds of extra spending and tax cuts in the 2023/24 financial year which starts next month.

Britain's budget forecasters predicted the economy would shrink by 0.2% in 2023, a less severe hit than the 1.4% contraction they previously saw.

(Graphic by Sumanta Sen; Polling by Prerana Bhat and Sujith Pai; Writing by William Schomberg; Editing by Catherine Evans)