Traders expect the next rate hike to be the last as the pound has hit a 15-week low against the dollar.
The pound hit a 15-week low against the dollar yesterday as traders bet that a potential interest rate rise this week would be the last.
Sterling fell to $1.2366 ahead of the Bank of England’s decision on Thursday, which is widely expected to raise rates to 5.5 percent from 5.25 percent.
The currency could suffer further damage if the Bank signals at its Monetary Policy Committee (MPC) meeting this week that the hike is over.
‘Any signs on Thursday that UK policy rates were anything like “restrictive enough” will likely weigh on the pound,’ said ING Bank’s Chris Turner.
Economists at US investment bank Goldman Sachs said a pause in rate hikes this week could also be a ‘possibility’.
Bank of England Governor Andrew Bailey (pictured) believes inflation is on track to decline ‘quite significantly’ by the end of the year
But overall they still expect the MPC to make another hike, the 15th in a row.
He suggests that it is more likely that the committee will ‘keep rates steady’ at its next meeting in November.
The end of rate hikes could provide a glimmer of hope for borrowers reeling from a series of hikes since December 2021 as the MPC struggles to tame inflation, which peaked at 11.1 percent last autumn. Was.
Higher interest rates already mean millions of homeowners face huge increases in monthly payments and business surveys suggest they could push the UK into recession.
Inflation, at 6.8 percent, remains well above the bank’s 2 percent target and yesterday’s data is expected to push it above 7 percent in August on the back of rising fuel prices.
Meanwhile, wages are still growing at record rates – another potential driver of inflation.
But Bank of England Governor Andrew Bailey believes it is still headed for a ‘quite significant’ decline by the end of the year and announced earlier this month that rates were near the ‘top of the cycle’ .
And other data, such as shrinking GDP and rising unemployment, suggest the economy is cooling.
Financial markets yesterday said there was more than an 80 percent chance rates would rise again this week.
But the chances of another increase in November are estimated at only around 30 percent.
Goldman experts said the bank would probably need clear signals before stopping interest rate hikes.
“Looking ahead to the November meeting, we remain more likely to see sequential wage and price pressures cool enough to prevent the MPC from taking a pause,” he said in a note to clients.
Economists at Citi, another US investment bank, also believe this week’s expected hike will be the last.
But signs of division among the nine-member MPC are already emerging.
Catherine Mann, the most hawkish member, warned last week that halting interest rate hikes risked fueling high inflation in the economy, saying she would make the ‘error of over-tightening’.
The rate decision this week comes a day after the bank’s counterparts at the US Federal Reserve announced their next move, which is expected to roil markets.