Bigger rates rise off the table as Bank of England ponders change

The contraction in the UK economy that was revealed this week likely rules out anything more than a small increase in interest rates as the Bank of England sets out its decision on Thursday, analysts have said.

The Bank’s Monetary Policy Committee is expected to hike interest rates for the fifth time in a row.

It was widely predicted to increase its base rate from 1%, already the highest in 13 years, to 1.25%.

It would be the first time since January 2009 that the rate has been higher than 1%.

Some had even speculated that it might reach 1.5% – a so-called 50 basis points (bps) rise.

But that was before official data showed that gross domestic product (GDP) shrank 0.3%, worse than many had predicted.

It will now fall to the nine-person committee to decide what is the best outcome. These include Andrew Bailey, the Bank’s Governor, two deputy governors: Sir Jon Cunliffe and Ben Broadbent; but also Huw Pill, its chief economist.

“April’s GDP data … surely will mean that the internal block – Bailey, Broadbent and Pill – sticks to voting to raise Bank Rate by 0.25% this month,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

“And given that some members thought last month that the guidance regarding further rises in interest rates was obsolete, we expect to see at least one of them, most likely Cunliffe, to vote for no change.

“With markets currently pricing in a 34bp increase in Bank Rate this week and a further 41bp rise for the August meeting, we expect both rate expectations and sterling to drop in the wake of this week’s meeting.”

Committee members will want to rein in inflation, which has hit highs not seen for decades.

Laith Khalaf, head of investment analysis at AJ Bell, said: “The Bank of England faces a stern test of its mettle at the next interest rate decision, and any hesitation is likely to result in the pound being punished on the currency markets.”

Such a drop would mean that the price of petrol and diesel, and other imports that the UK pays for in dollars, would rise.

This month, the average price of filing a family car topped £100 for the first time.

Any further jump is unlikely to be welcomed by drivers.

There are many indications that the Bank might hike rates.

The MPC has voted for a rise in each of the last four meetings, in December, February, March and May.

Last time three out of nine members of the Monetary Policy Committee already voted for rates to be set at 1.25%.

However, some things have changed since then. The UK economy looks set to struggle, with an OECD forecast predicting it will be the weakest in the Group of Seven (G7) next year.

“By raising interest rates, the Bank is putting the brakes on an economy that is already slowing of its own accord,” Mr Khalaf said.

“That risks the economy stalling, or worse, going into reverse.”

The Bank has been given a little more wriggle room by the Chancellor, who is set to funnel billions to struggling households to help them deal with soaring energy bills.

An interest rate raise will eat away at some of this handout, because the cost of borrowing will go up for homeowners.

But equally drivers would suffer if rates are maintained and savers will benefit from a hike.

People are certainly expecting rises to come. According to a survey commissioned by the Bank of England and performed by Ipsos in early May, 70% of people expect rates to rise over the next 12 months.

The survey, released on Friday, showed that 28% thought a rate rise would benefit the economy, 22% said the same about a drop, and 28% want them to remain at current levels.