Goldman Sachs warned that the Bank of England may be forced to increase interest rates this summer to 5%, due to Britain’s struggle to reduce the highest inflation rates among advanced economies.
Threadneedle street is widely expected to raise the cost of borrowing by households and businesses for a 12-th consecutive time on Thursday. Financial markets expect a quarter point increase to 4.5%.
The US Investment Bank warned that the cost of borrowing for households and businesses may increase further as the central banks struggles to reduce the highest inflation rates in 40 years.
The inflation rate is still in double figures, despite a less than expected drop in March. It stands at 10.1%. British households are also facing the highest annual increase in food and beverage prices since 1977.
After Rishi’s promise to halve the inflation rate this year, if the inflation rate remains higher than expected it will continue to put pressure on the households and be embarrassing for the Government. When he made his promise, the inflation rate was 10.7%.
Goldman stated that while UK inflation is on course to fall quickly, thanks to the cooling of global energy prices the measure of rising costs of living will not drop enough to reach the Bank’s target of 2% set by the Government.
Ibrahim Quadri is an economist with a US investment bank. He said that it was possible for the [Bank of England’s] rate-setting monetary policy committee to want to slow down the hikes to a quarter-by-quarter pace after its May meeting. However, we are sceptical about whether this will be possible given the ongoing inflationary pressures.
We therefore expect that the monetary committee will continue to raise rates in 25 basis-point steps, until they reach a terminal rate 5% in August.
The financial markets do not expect rates to reach 5%, but they do anticipate that the central bank will increase rates this year above the 4.5% mark. Some economists also believe that Threadneedle Street may halt its rate-hiking after the meeting this week.
Globally, central banks have raised borrowing costs to combat inflation that has soared since the Covid pandemic. They also increased rates in response to the war between Russia and Ukraine. Christine Lagarde warned that the European Central Bank had “more ground” to cover after increasing rates to 3.25 percent.
The head of central bank for the Eurozone said that inflation in the 20-nation area remained “too large”, and warned companies to take advantage of high inflation by pushing through price increases.
Investors in the US are betting on the Federal Reserve being forced to lower rates this year due to the fallout of the worst banking crisis that has occurred since 2008. Last week, the Fed increased rates to 5% from 5.25%. However, the US economy has proven resilient in recent months, including figures last week showing a stronger-than-expected 253,000 rise in employment in April.
Bank of England’s likely rate hike comes at a time when households and businesses in the UK are under increasing pressure due to past rate increases. Millions of borrowers have fixed their mortgages or loans with lower rates, and these deals will soon expire. Around 1.4 million fixed-rate mortgages for households are set to expire in this year.
The British economy has done better than expected over the past few months, thanks to resilient consumer spending levels and rising business confidence despite a cost-of-living crisis.
Goldman said that the Bank is likely to upgrade its growth forecasts as the UK will likely avoid a long recession.
“We believe the UK can avoid an economic recession.” Jari Stehn is Goldman Sachs chief European economist. He said that the Bank of England’s growth forecast was more negative than what Goldman Sachs has presented.
The US bank stated that wage growth was more likely than expected in the UK, a trend it said was incompatible with Threadneedle Street’s 2% inflation goal.
The Office for Budget Responsibility said that the Office for Budget Responsibility’s March spring budget forecast of 2.9% was significantly lower than the 4.2% inflation rate predicted by the Office for Budget Responsibility.