FX.co ★ Bank of England may raise rates on December 16

Economists are saying that the Bank of England will be the first major central bank to raise interest rates. They project that it will be as early as next month.

A recent survey from Reuters indicated that many are anticipating a 15-point rate hike (from the current 0.10%) on December 16, while slightly less than half of the respondents said that the bank will stand firm. If there really is an increase next month, then it will be the bank's first time since 1994.

Below is how pound reacted to this news:

Marchel Alexandrovich, senior economist at Jefferies, said the December meeting will be lively, and the labor market data will play an important role in determining the future of rates. As such, if the December report turns out weaker than anticipated, then the decision on rates will be postponed until February.

But most economists predict growth by the end of March, as economic recovery in the UK lagged behind other wealthy countries. Reports have shown that GDP grew by only 1.3%, the weakest in three months since the country was locked down in early 2021. Ongoing controversies in Brexit also exacerbated supply chain problems.

Forecasts are also down compared to last month, dropping to 1.0% this quarter and 0.8% for the next. But in 2022, growth is expected to be around 5.0%, while in 2023, it should be at 2.1%.

Nevertheless, more than half of the respondents said the economy will return to pre-quarantine levels by the end of March.

In terms of inflation, many say it will remain twice the 2.0% target set by the central bank.

It is expected to average at 4.1% this quarter, 4.2% the next and 4.2% in the second quarter of 2022. Last month, the corresponding forecasts were 3.9%, 4.0% and 3.5%. The average for 2022 is now 3.2%, up from the October forecast of 2.8%.

Bank of England Governor Andrew Bailey said the central bank will act if higher inflation expectations led to higher wages.