Traders are betting the next rate hike will be the last as the pound hits a 15-week low against the dollar
The pound hit a 15-week low against the dollar yesterday as traders bet this week’s expected rate hike will be the last.
Sterling fell as low as $1.2366 ahead of a Bank of England decision on Thursday that is widely expected to raise interest rates to 5.5 percent from 5.25 percent.
The currency could take another hit if the bank announces that interest rate hikes have ended at this week’s Monetary Policy Committee (MPC) meeting.
“Any indication on Thursday that the UK interest rate was anything like ‘sufficiently tight’ would most likely hit the pound,” said Chris Turner of ING Bank.
Economists at US investment bank Goldman Sachs said a pause in interest rate hikes as early as this week may even be a “possibility”.
Bank of England Governor Andrew Bailey (pictured) expects inflation to be heading for a “quite significant” fall by the end of the year
However, all in all, they still expect another increase in the MPC, the 15th in a row.
It is more likely, they suspect, that the committee will “keep interest rates stable” at its next meeting in November.
An end to rate hikes could offer a glimmer of hope for borrowers who have been suffering from a series of rate hikes since December 2021 as the MPC struggled to bring down inflation, which peaked at 11.1 percent last fall.
Higher interest rates already mean millions of homeowners face a sharp rise in monthly repayments and business surveys suggest they could push the UK into recession.
Inflation remains well above the bank’s 2 percent target at 6.8 percent and tomorrow’s figures are expected to show it rose back above 7 percent in August due to rising fuel prices.
Meanwhile, wages are still rising at record levels – another potential driver of inflation.
However, Bank of England Governor Andrew Bailey expects interest rates to still be heading for a “fairly significant” decline by the end of the year, and said earlier this month that rates were nearing the “peak of the cycle”.
And other data like shrinking GDP and rising unemployment suggest the economy is cooling.
Financial markets yesterday priced in a probability of over 80 percent that interest rates would rise again this week.
However, the chances of a further increase in November are only estimated at around 30 percent.
Goldman experts said the bank likely needs clearer signs before it stops raising interest rates.
“Looking ahead to the November meeting, we see a greater chance that sequential wage and price pressures have cooled enough for the MPC to go on hold,” it said in a note to clients.
Economists at Citi, another U.S. investment bank, also expect this week’s rate hike expected to be the last.
However, there are already early signs of a split in the nine-member MPC.
Catherine Mann, the most hawkish member, warned last week that suspending interest rate hikes would risk high inflation in the economy and said she would prefer to err on the side of “too tight tightening.”
This week’s interest rate decision comes a day after the bank’s counterparts at the Federal Reserve announced their next move, with markets expecting a pause.