The Bank of England is expected to raise interest rates by 75 basis points on Thursday, its largest hike in 25 years, but economists think policymakers will be cautious as the likelihood of a recession increases.
With U.K. inflation running at a 40-year high of 10.1% in September, the Bank is seen hiking its main lending rate for the eighth consecutive time.
Fiscal and monetary policy are no longer pulling in opposite directions as a result of the scrapping of the controversial tax cuts at the heart of the previous government.
The Bank's Monetary Policy Committee will not have to deal with the inflationary impact of government policy because of the government U-turns.
Goldman's economists lowered their projections for the U.K.'s growth from an annual rate of 1% to 1.4% due to Sunak's less generous energy cost assistance scheme.
There is less pressure for the BoE to act aggressively at next week's meeting, but we still believe that a step-up in the pace to 75 basis points is likely given that fiscal policy is on net more expansionary than assumed.
A split vote in favor of the 75-basis-point hike is expected by the Wall Street giant.
The Chief U.K. economist and Chief European economist expect the Monetary Policy Committee to explain the step-up in the hiking pace with ongoing inflationary pressures and additional support to demand from the announced fiscal measures.
We don't think there will be significant changes to the forward guidance and look for the MPC to keep its meeting-by-meeting approach.
A 75-basis-point hike in the key interest rate is expected to be approved on Thursday.
The German lender said in a note that it expects the MPC to relay three important messages to the market.
The economic outlook has deteriorated further and the U.K. economy now faces a deeper and more longer recession than previously thought.
Policy is not set in stone. Increased volatility in inflation, a broadening out of price pressures, and a ramping up of wage and price growth in the year ahead warrant further tightening and front loading of rate hikes.
Policy needs to go a little further than anticipated, particularly with inflation expectations slipping and second round effects getting better.
Raja suggested that an eventual Bank Rate of 5% would cause balance sheet stress for households and businesses that are already struggling.
The Governor is expected to stress at the press conference that the Bank will attempt to avoid an over correction in rates that would set the economy back further from its pre-pandemic levels.
The Bank Rate is expected to reach 4.5% by May next year, down from its previous projection of 4%, on account of retreating fiscal stimuli and a push towards fiscal consolidation.
Ben Broadbent, deputy governor for monetary policy at the Bank of England, said in a recent speech that GDP would take a hit from policy tightening. The Bank's August growth forecasts were based on a lower Bank Rate.
The new set of forecasts due, which are based on market interest rate expectations, are likely to be dismal.
There is a hint that market pricing is not compatible with achieving inflation goals.
After sinking to a record low against the dollar, the pound gained some respite thanks to Sunak's appointment and the retention of Jeremy Hunt.
If a 75 basis point hike on Thursday is accompanied by dovish rhetoric, sterling could be at risk.
A BoE hike is unlikely to bode well for the currency given the squeeze in shorts. The French lender's strategists said in a note that they stay short of the British pound.
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