(Bloomberg) -- The Bank of England on Thursday is likely to deliver its 10th consecutive interest-rate increase alongside forecasts underscoring the risk that inflation becomes more persistent in the UK economy.

Economists and investors anticipate the central bank will raise its benchmark lending rate by a half point to 4%, the highest since 2008 and continuing the quickest series of hikes in over three decades.

Policy makers led by Governor Andrew Bailey also will unveil their inflation and growth forecasts, probably pointing to a shallower recession than they projected in November.

Officials are due to release an annual update of the supply potential of the economy and a survey of wage growth. Both of those could point to the risk that inflation becomes more persistent. Officials are worried that a record leap in wages will lead companies to boost prices — and consumers to expect more increases.

The decision is due at 12 p.m. London time. Bailey and his colleagues will speak to the press a half hour later. Following are the key elements of the decision:

Interest Rates

Money markets haven’t fully priced in a half-point hike at this meeting, indicating some doubt. Since December’s decision, investors have reined in expectations for where rates peak to about 4.5%. In November, the expectation was for 4.75%.

An increase to 4% on Thursday would be the fourth half-point hike in this cycle. Policy makers moved by an unprecedented three-quarters of a point in November in the wake of the disastrous budget program announced during Liz Truss’s brief term as prime minister.

“We view the decision on whether to hike by 25 basis points or 50 as a finely balanced one,” said Victoria Clarke, chief UK economist at Santander CIB. “Given the concern over the damage embedded inflation would cause, we believe that a majority of the MPC will consider an increase in bank rate to 4% to be prudent.”

The BOE’s decision follows the US Federal Reserve’s quarter-point rate increase on Wednesday night, which marked a slowdown in its tightening spree. The European Central Bank later Thursday is expected to raise its key rate a half point to 3%.

What Bloomberg Economics Says ...

“A slew of evidence showing sticky inflation will likely push the Bank of England to lift rates by 50 basis points at its first meeting of the year. We think the move will bring the central bank within touching distance of the terminal rate for this hiking cycle, though policymakers will probably refrain from giving a firm signal that borrowing costs are close to peaking.”

—Dan Hanson and Ana Andrade, Bloomberg Economics. Click for the PREVIEW. 

Vote Split

The nine-member Monetary Policy Committee split three ways last time, with Bailey voting with the majority for a half-point hike. 

Catherine Mann pushed for a bigger increase, observing signs that longer-term expectations about inflation have become detached from the BOE’s 2% target and arguing that moving faster will help prevent a wage-price spiral. Two others, Swati Dhingra and Silvana Tenreyro, wanted no change.

Economists expect that pattern to continue at this meeting.

Growth Outlook

Output grew unexpectedly in November, meaning the economy probably avoided a recession last year. The BOE’s new forecasts are likely to show a slump will be shallower than previously expected — but last into 2024. 

That’s a problem for Prime Minister Rishi Sunak, whose government must fight an election by early 2025 at the latest. Lackluster growth is among the factors weighing on his poll ratings, leaving the Labour opposition consistently 20 points ahead of the Conservatives.

Inflation Forecast 

Most economists expect the BOE to cut its inflation forecast for this year, but the picture is more foggy further out. Economists are divided about 2024, and most expect 2025’s reading to be higher than the BOE forecast in November.

Those figures will help the BOE explain why interest rates may need to rise again in the coming months — and remain elevated. That contrasts with growing expectations among investors for a rate cut by the end of this year.

Stickier-than-expected services inflation in December, driven by rising prices in hotels, restaurants and travel, may encourage BOE officials to push for a 50 basis-point hike Thursday, according to some economists.

Others, however, think the heat in the services sector will prove to be a blip, caused by the fact that few people were traveling a year earlier due to the spread of the omicron variant of the coronavirus.

Special Reports

Officials are preparing an annual pay survey and an assessment of the supply capacity of the economy, a measure of the economy’s “speed limit.”

The survey is expected to show that employers are planning further increases in pay settlements this year, while the supply review is likely to point to a tighter labor market than thought. Those factors are helping push up prices, underpinning the need for rate hikes — even though the economy is weakening.

In 2022, the wage survey anticipated 4.8% pay rises, the highest in its 15-year history. The latest official figures show average earnings excluding bonuses were 6.4% higher in the three months through November than a year earlier. Outside the pandemic, that’s the biggest increase since records began in 2001.

While wages are rising rapidly, inflation is higher. That’s eating away at the spending power of consumers. Key to the outlook for rates is how those competing factors feed into the BOE’s inflation and growth forecasts.

Quantitative Tightening

The BOE built up a portfolio of government and corporate bonds worth £895 billion during more than a decade of quantitative easing. It’s now winding down that balance sheet, both by allowing bonds to mature and through direct sales.

About £828 billion in gilts and £12 billion of corporate bonds remained on the books at the end of January. The BOE will set out its thinking about the pace of sales expected this year.

The UK Treasury meanwhile also is scheduling more bond auctions to cover its widening budget deficit.


Read more:

  • SURVEY: BOE to Raise 2023 GDP and Earnings Forecasts This Week
  • UK Budget Deficit Soars With Cost of Debt, Energy Support
  • UK Mortgage Holders Seek Variable Rates in Bet BOE Cut Is Coming
  • Fed Slows Rate Hikes, Signals Further Increases Are Coming

--With assistance from Harumi Ichikura, Andrew Atkinson, Lucy White and Tom Rees.

©2023 Bloomberg L.P.