Andrew Bailey has told CNBC that the Bank of England is cautious in its battle to tame stubbornly high inflation, as UK data continues to offer “unwelcome surprises.”

Here’s a video clip from this lunchtime’s press conference at the Bank of England, following its latest increase in interest rates:

BoE governor Andrew Bailey has defended the Bank against criticism that it has raised interest rates too high.

He’s been interviewed by ITV News, who ask if there is a risk that the Bank goes too far, as some former senior staff from the BoE fear.

Bailey replies that there are areas of the economy where the Bank has not yet seen evidence that inflation is reliably on the way down – such as in the services sector.

Bailey says:

I hope and believe we’ll get there pretty soon, because I do think we’re going to see quite a marked fall, but we haven’t got there yet.

Q: Andy Haldane, the Bank’s former chief economist, says raising rates runs the risk of propelling a brick towards the financially vulnerable – is that a risk you’re prepared to take?

Bailey says the Bank is “very cognisant” of the fact that some people are very seriously affected by rate increases.

But, he adds, UK banks are in a strong position to support their customers.

Bailey also takes a pop at some of the commentators on the sidelines – only a month or two ago, he says, some people were saying rates would have to hit 6% to cool inflation.

BNP Paribas’s Markets 360 team have cut their forecast for the peak in UK interest rates to 5.5%, from 5.75% previously.

But they also predict that rates may fall less slowly than previously expected:

The shift in emphasis from the level of restrictive rates to their duration suggests that the Bank of England’s Monetary Policy Committee is guiding towards the end of the tightening cycle.

As a result, we lower our terminal rate forecast from 5.75% to 5.50%, which we expect to be reached at the September meeting.

However, as the BoE has said it is taking a “different path” to achieve the same end result, implying that the risk is for later and/or shallower cuts than we currently expect.

Ed Conway of Sky News points out that the UK’s growth outlook is miserable.

That’s unlike the US where the economy has, excitingly, returned to its trend levels before the financial crisis 15 years ago:

Forecasts continue to pour in, with Rabobank predicting the BoE will raise interest rates one more time, in September, before pausing its hiking cycle.

RBC Capital Markets say there was “little in the way of explicit guidance” today from the Bank of England on the near-term path of Bank Rate.

But they suspect that the BoE is close to ending its cycle of interest rate rises which began back in December 2021 (when it raised Bank rate from 0.1% to 0.25%).

RBC Capital Markets says:

There was though a significant insertion into the policy summary and minutes of the sentence “Given the significant increase in Bank Rate since the start of this tightening cycle, the current monetary policy stance is restrictive”.

To our minds, that was a signal from the Committee that, even though they continue to be data led, they think they are close to the end of the current hiking cycle.

In the press conference Deputy Governor Ben Broadbent avoided giving a definitive level for where neutral or r* may be but did say that the MPC “think we are seeing evidence” that interest rates are “above that neutral level because we are seeing an impact on demand”.

HSBC UK and first direct have also announced plans to raise some savings rates from 10 August.

Among the increases, first direct’s Savings Account and HSBC UK’s Flexible Saver rates will both increase by 0.25 percentage points, from 1.75% to 2.00%. Both deals are instant access accounts.

NatWest Markets has cut its forecast for the peak in Bank of England interest rates to 5.5%, down from 6%, after the BoE’s announcement today.

NatWest Markets’ chief UK economist, Ross Walker, wrote in a note to clients:

We are revising our Bank Rate forecast and now look for just one more 25bp hike to 5.5% in September.

The apparent rowing-back in the MPC’s policy-tightening guidance leaves us comfortable maintaining our negative bias on sterling.

The Bank of England may not start to cut interest rates until the third quarter of next year, predicts Andrew Goodwin, UK chief economist at Oxford Economics:

We think the projection for pay growth looks a little too low. Our proprietary sentiment data developed in collaboration with Penta suggests the momentum behind pay growth is likely to remain stronger. Also, as we argued in a recent note, there’s good reason to think that second round effects will prove persistent. Inflation expectations may not fully decline in line with headline inflation because of the scarring effects on inflation psychology from recent high inflation rates. Moreover, even if inflation expectations fall, pay growth may stay above a target-consistent pace as workers seek to recoup lost real wages. Core inflation may also be slow to fall if firms seek to rebuild margins.

We think the scope for further upside surprises for pay growth means that one final 25bps hike in September is likely, taking Bank Rate to a peak of 5.5%. Financial markets temporarily repriced after the announcement, cutting their expectations for peak Bank Rate by around 15bps.

But the press conference encouraged them to reconsider and, at time of writing, markets fully price in two more 25bps hikes, as they had prior to the meeting.

The MPC also cut its forecast for GDP growth next year to 0.5%, bringing it close to our own projection. It also lowered its forecast for GDP growth in 2025 by 0.5ppts to just 0.25%. In our view, this looks exceptionally weak, but it reinforces the idea that the BoE views virtually any growth as being inflationary. Against this backdrop, we retain our call that the first UK rate cut will come in Q3 2024, several months later than the Fed and ECB.

Today’s increase in interest rates is likely to spark concerns for businesses across the UK who have already experienced a challenging few years, warn Dr Arun Singh, global chief economist at Dun & Bradstreet.

Our recent research shows that businesses are still dealing with weak consumer demand. This economic uncertainty calls for more resilience, and it’s important for businesses to have a detailed view of their ecosystem to help navigate the current environment.

Having access to data that provides more visibility of supply chains, financial pipeline and customer needs is critical for businesses to predict, prepare and secure their future success.

BoE governor Andrew Bailey was insistent at today’s press conference that the Bank of England was data-dependent – further interest rate moves will depend on the path of the economy.

Melanie Baker, senior economist at Royal London Asset Management, explains:

With domestically driven inflation pressure still looking strong, I continue to think we aren’t quite at peak rates in the UK and pencil in another 25bp rate rise this year.

Much, of course, will depend on how the data evolves – as it will for all the major central banks.

July’s inflation report will be a crucial factor, especially now that Bailey has predicted the CPI index will fall to around 7%, from 7.9% in June:

Investec, the bank and wealth manager, says today’s UK interest rate rise is the latest phase of the sharpest monetary policy tightening cycle since UK inflation targeting began (in 1992, I believe).

Investec economist Philip Shaw argues that rates are approaching their peak (or ‘terminal rate’, in City jargon):

The level of the Bank rate is now at a 15½ year high and, as the BoE points out, the stance of policy is undoubtedly restrictive.

Unless labour market pressures turn out to be considerably more durable than we believe them to be, further spare capacity should be opened up in due course and we should be close to the terminal level of the Bank rate.

We stand by our view that the peak in Bank rate will occur at 5.75%, although we have now shifted the timing of this out to Q4 from Q3.

Some financial firms have announced they are increasing their savings rates following today’s Bank of England rate rise.

Nationwide building society says current account customers on its Flex Instant Saver 2 account will see the rate increase by 0.25% to 3.25%, matching the increase in Bank rate.

Its Triple Access Online Saver will see an increase of 0.75%, with it now paying 4.25%.

Marcus by Goldman Sachs also notified savers of immediate rate increases.

It told customers the underlying rates on its Online Savings Account, Cash Isa and Maturity Saver have increased from 3.64% to 3.94%. Holders of an Online Savings Account or Cash Isa with a bonus rate will receive a new total rate of 4.30%.

Chancellor Jeremy Hunt has welcomed the Bank of England’s forecast that inflation will fall.

In an interview with Sky News, Hunt says any rise in interest rates is a worry for families with mortgages, and for businesses with loans.

But, he adds, underneath today’s decision is a forecast that inflation will be 2.8% this time next year, and the economy will avoid recession.

Hunt also offers his analysis of the Bank of England’s comments, saying:

What the Bank of England governor is saying is that we have a plan that is bringing down inflation, solidly, robustly and consistently.

Hunt says the government’s plan is working, but it must stick to that plan, and not “veer around like a shopping trolley” [which, incidentally, is how Dominic Cummings described Boris Johnson’s style of government].

This won’t please mortgage borrowers: Nicolas Sopel, head of macro research & chief strategist at Quintet Private Bank, believes UK interest rates will rise to 6%.

Sopel explains:

The BoE noted some progress on the inflation front, “falling but still too high”. However, the Bank’s projections, which were revised slightly lower for 2023 and 2024, still revealed that inflation will remain above the 2 per cent target and only return to that target by the second quarter of 2025.

This underscores the MPC’s view that the Bank Rate must remain restrictive for longer.

While economic data has turned more mixed and despite slowing growth, we think that the Bank of England will continue to raise the Bank Rate in 2023, bringing it to 6 per cent. This is because underlying price pressures remain elevated, driven by strong wage growth.

The BoE will likely be the last central bank in developed markets to pause its tightening cycle.

Laith Khalaf, head of investment analysis at AJ Bell, argues that the Bank of England should now resist any further interest rate rises.

Another day, another interest rate hike. It’s business as usual for the Bank of England’s rate setting committee, with two zealous members actually wanting to raise rates to 5.5%.

However, its own numbers show that more interest rate hikes will make almost no difference to inflation in the medium term. But they will of course inflict more pain on consumers and businesses, and in particular mortgage holders. Sometimes doing nothing is the hardest approach, but there is increasing evidence that’s the path the Bank should now be following.

Based on their own projections, inflation will fall to 1.5% in three years’ time if the Bank hikes rates to 6% and then trims them back to 4.5%. At the same time its forecasts say CPI will fall to 1.4% if interest rates just stay where they are.

This supports a pause in rate hikes, especially because the cost-of-living crisis engulfing consumers is currently being exacerbated by high interest rates.

The full effect of monetary policy takes around 18 to 24 months to ripple out into the economy, so a hiatus in rate activity would also give the bank more time to assess the impact of its past actions.

UK interest rates may not start to be cut until late next year, predicts Paul Dales, chief UK economist at Capital Economics.

But Dales also believes rates could then be cut quickly, if Britain falls into recession:

The Bank’s new forward guidance suggests it has learnt the lessons from the 1970s and 1980s that core inflation falls from its peak only slowly and that cutting interest rates too soon risks reigniting inflation.

We’re not expecting rates to be reduced until late in 2024. That said, if we’re right in expecting higher interest rates to trigger a mild recession and eventually significantly reduce wage growth/core inflation, then the next big surprise may be how quick the Bank cuts rates in late 2024 and 2025.

The Bank of England could be forced to cut rates quickly next year, if its recent programme of rate rises prove to be a mistake.

So says Orla Garvey, senior fixed income portfolio manager at Federated Hermes Limited, who explains:

Looking ahead, the BoE are still in the suboptimal position of having to be reactive to spot service prints and labour market data, given volatility in the gilt market this year.

This leaves them exposed to policy mistakes, and hence we continue to believe that there is a risk they will have to cut rates just as quickly through 2024 as tight policy starts to impact the economy.

This chart shows how UK inflation is expected to drop over the coming months:

The financial markets have reduced their forecasts for how high UK interest rates will rise in the coming months.

The money markets are now suggesting that rates will peak at around 5.7% in March, down from over 5.75% before the Bank of England’s announcments at noon today.

That’s the end of the press conference – so here’s some reaction to the Bank of England’s interest rate decision, from the CBI:

Q: Will Russia’s withdrawal from the Ukraine grain deal have an impact on UK food inflation this year?

Andrew Bailey tells today’s press conference that he has spent a lot of time visiting food producers and retailers. They have told him that food price inflation is declining, and will continue to do so.

But it has taken longer than expected, due to high energy costs and also because farmers took out longer contracts for fertiliser, for example, due to supply worries.

Q: Have you got interest rates right, or have you made a mistake? Should you have embraced a recession earlier, to bring inflation down faster?

Andrew Bailey says you can’t set monetary policy with the benefit of hindsight.

He explains that if the Bank had known that energy prices were going to surge after Russia invaded Ukraine, it would have had to make some “slightly eye-popping” policy decisions to keep inflation on target.

He adds that the UK economy has been hit by some huge shocks. There are lessons that can be learned, but that does not mean that the BoE got things wrong (he argues).

Q: Your forecasts suggest that growth is very close to falling into recession at the end of next year, but inflation is still over target. Does that mean there is less room to cut interest rates then?

Deputy governor Dave Ramsden explains that the Bank has raised its forecasts for how high interest rates will be, which will weigh on growth.

Ramsden warns that the economy isn’t expected to really grow next year, saying.

That is the impact of tighter financial conditions, from the market-implied [interest rate] curve and also the exchange rate being rather stronger in this forecast.

Q: We used to think it took 18 months to 2 years for an interest rate rise to have its full effect. Has that changed?

Deputy governor Ben Broadbent says the overall effect hasn’t changed.

But there may be some parts of the economy where the lag is longer, such as in the mortgage market (as more people are on fixed-rate deals).

On savings rate, Andrew Bailey says there is evidence that the previous half-point rate rise announced in June was passed on to savers pretty much in full.

That was not the case previously, he points out.

Q: In today’s monetary policy report, you’ve set out various ways in which the forecasts are more of a judgement call than usual. It seems there are various areas where the MPC don’t believe the numbers that come out of your models.

Is the Bank’s forecasting broken?

Andrew Bailey says the Bank’s model’s aren’t built to handle the series of shocks that have hit the economy – they don’t have data to show the impact of a global pandemic, or a war in Europe.

It’s not a fault of the modelling process, he insists. But he hopes the Bank will get “a lot of value” out a review of its forecasting, which will be led by former top US central banker, Ben Bernanke.

Deputy governor Ben Broadbent insists that real incomes are now rising (ie, pay is rising faster than inflation).

The Bank estimates that in this calendar year, real labour income will be higher than last year, and the same is true for next year.

[the latest official data, up to May, shows real wages falling, but Broadbent insists the picture is brighter right now].

Our economics editor, Larry Elliott, asks the Bank about its warning that policy will remain ‘restrictive’ to bring inflation down.

Q: Are you saying ‘if it isn’t hurting, it isn’t working’? And will the amount of pain depend on the willingness of workers to take a real pay cut?

The ‘if it isn’t hurting, it isn’t working’ line was populised by John Major in 1989 (see this speech in 1995).

Governor Andrew Bailey says he won’t use words like pain, reiterating that the economy has been more resilient than expected.

Defending the Bank’s policy of raising interest rates over the last 20 months, he says:

Inflation has a very serious effect, and particularly on the least well-off.

He adds that the Bank is not forecasting a recession.

We hope we can deliver the path that we set out in the [monetary policy] report, as that path does not have a recession in it. We will have to see.

Q: Last week, European Central Bank chief Christine Lagarde suggested that eurozone interest rates may be peaking. Are you saying the same in the UK?

Governor Andrew Bailey emphasises the Bank of England is ‘evidence-driven’. There has been “quite contrasting evidence” in recent months, so it isn’t time to declare that it’s all over.

Q: If policy is restrictive now, where would ‘neutral’ interest rates be?

Deputy governor Ben Broadbent takes this question – citing an economic paper arguing that you only tell in hindsight where the neutral rate of interest is [called r*, this is the level where rates neither stimulate the economy nor restrict it].

Right now, though, Broadbent suggests rates are above neutral rate, but he refuses to say what r* would be.

Q: Why has the Bank used this new language about keeping interest rates ‘sufficiently restrictive for sufficiently long’? Are you worried that households expect rates will fall back?

Andrew Bailey says current policy is having an effect on inflation, and that rates are also at restrictive levels in the US and eurozone.

He explains:

In order to get inflation back to target, we are going to have to keep this stance of monetary policy.

But that stance can incorporate quite a lot of different paths of interest rates.

Onto questions… starting with Sky News’s Ed Conway.

Q: Many families are hoping that interest rates will fall – are you saying we need to prepare for interest rate to be higher for longer than expected?

Governor Andrew Bailey points out that the financial markets expect rates to fall, but they also predict they will rise higher first.

There are many potential paths for interest rates, Bailey says.

He points out that if rates were to remain constant, the Bank’s forecasts show inflation returning to target.

He says the Bank has to balance risks of inflation, against risks that economic activity weakens.

BoE governor Andrew Bailey warns that “further tightnening of monetary policy” will be needed if the Bank sees signs of more persistent inflationary pressures.

We will ensure that Bank rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainable, in the medium-term.

On wages, Andrew Bailey predicts that pay growth will fall ‘more slowly’ than economic models would suggest.

It may take longer for ‘second-round effects’ (where inflation pushes up pay demands) to fall away than it took them to arrive, he suggests.

Services price inflation, though, is projected to remain high, Andrew Bailey tells reporters at the Bank of England press conference.

The MPC is watching this measure very carefully, he adds.

Governor Bailey cautious, though, that core goods inflation is broad-based, as it is taking time for falling energy costs to feed through supply chains.

But the Bank does expect core goods inflation to ease over the rest of this year.

Food and non-alcoholic drinks inflation has been “very high”, Bailey says, “but it does appear to have peaked”.

The Bank of England is holding a press conference now to explain why it has raised interest rates for the 14th time in a row, to a 15-year high.

Matt Smith, Rightmove’s mortgage expert, is hopeful that mortgage rates will fall in the coming weeks, despite today’s interest rate rise.

Smith explains:

“After a rollercoaster few weeks, the market position today is actually largely similar to six weeks ago, in that today’s rate increase was much anticipated by lenders and has been largely factored in already to mortgage rates, meaning we expect mortgage rates to continue their slow downward trajectory over the next few weeks.

June’s more positive inflation numbers have given the market renewed confidence that inflation will continue to fall, and the Base Rate won’t have to go as high as previously feared, meaning lenders can tentatively start to reduce rates.

All eyes are now on July’s inflation figures in a couple of weeks – more positive news could accelerate rate drops, while any surprises would temper the current renewed market optimism.”

The Bank of England says inflation is still too high, so it needed to take action to make it fall further.

But it also points to “some promising signs”, pointing out that inflation has begun to fall, the economy is growing, and unemployment is low.

Shadow chancellor Rachel Reeves says:

“This latest rise in interest rates will be incredibly worrying for households across Britain already struggling to make ends meet.

“The Tory mortgage bombshell is hitting families hard, with a typical mortgage holder now paying an extra £220 a month when they go to re-mortgage.

“Responsibility for this crisis lies at the door of the Conservatives that crashed the economy and left working people worse off, with higher mortgages, higher food bills and higher taxes.”

Looking further ahead, the Bank of England is forecasting that inflation will hit its 2% target in the second quarter of 2025.

It then falls below the target in the medium term, the Bank says, “as an increasing degree of economic slack reduces domestic inflationary pressures, alongside declining external cost pressures”.

The Bank of England says there are signs that the UK’s labour market is loosening, although the jobs market remains tight.

It says:

The LFS unemployment rate rose to 4.0% in the three months to May, somewhat higher than expected in the May Report, and the vacancies to unemployment ratio has continued to fall, although the latter still remains above historical averages.

The Bank of England says it expects the UK economy to continue to grow, despite its latest increase in interest rates today.

Its economists expect underlying quarterly GDP growth of 0.2% in 2023 Q2 and Q3.

The minutes of this week’s MPC meeting say:

Underlying quarterly GDP growth has been around 0.2% during the first half of this year.

Bank staff expect a similar growth rate in the near term, reflecting more resilient household income and retail sales volumes, and most business surveys over recent months.

Monetary policy acts with a lag, as the Bank of England is keen to point out.

That means that any change in interest rates today will take time to reach the ‘real economy’.

The New Economics Foundation point out that previous rate rises (there have been 13 since December 2021) have yet to fully have their effect; they’re urging the BoE to resist further rate rises today.

Darren Power, credit insurance and insolvency expert at Atradius UK, which provides credit insurance to companies, warns that the UK is already ‘on the edge of recession’, without another rise in borrowing costs.

Ahead of the Bank of England’s interest rate decision in 15 minutes…. Power says:

“After last week’s positive inflation rate news, I’m sure many of us were hoping that interest rates would follow suit. After a tough couple of years for businesses and consumers, the news that the Bank of England is likely to raise rates to a 15 year high – potentially as high as 5.5% - won’t be welcome. But the reality is that the inflation rate remains high, and so a 14^th consecutive increase is unfortunately very likely.

“The government is ultimately teetering on the edge of recession, and we are all feeling the pressure. Our own data shows firms are already struggling with cash flow, with claims for late and failed payments continuing to creep up across the board with claims received in the second quarter of 2023 increasing 24% year-on-year.

These late and failed payments are one of the earliest warning signs that a business is at risk of insolvency and the increase indicates that there are still challenges ahead for businesses – coping not only with inflation and interest rates but the continued effects of the pandemic and supply chain issues adding to the burden.

With just 20 minutes to go… here’s the latest predictions for the Bank of England decision, from Matthew Ryan, head of market strategy at global financial services firm Ebury.

“We expect the Bank of England to revert back to a 25 basis point rate increase this week, with the June inflation miss and signs of a modest slowdown in the UK economy likely to warrant a smaller hike.

“Once again, however, the MPC is unlikely to be in total agreement, and we could see a three-way split vote, where one member (Dhingra) supports no change, while one or two plump for a 50 basis point move.”

The pound has dropped to a five-week low against the US dollar.

Sterling has lost half a cent to $1.265, its lowest level since 30 June, as traders await the noon announcement from the Bank of England.

Here are more photos from the Positive Money protest outside the Bank of England this morning:

Tension is on the rise in the City, with just an hour to go until the Bank of England’s interest rate decision.

Investors still broadly expect the Bank to raise interest rates by a quarter of one percent, from 5% to 5.25%, but a larger increase to 5.5% can’t be ruled out.

Charalampos Pissouros, senior investment analyst at XM, explains:

According to the UK overnight index swaps (OIS), market participants assign a 63% probability for a quarter-point increase, with the remaining 37% pointing to 50bps. Therefore, should the Bank proceed with 25bps, those expecting more may be disappointed and the pound could initially slide.

However, considering that underlying inflation in the UK is still more than triple the BoE’s objective, allowing traders to believe that the end of this tightening crusade is drawing closer may be an unwise choice. Ergo, officials may have to sound hawkish and highlight the need for more action, which could help the pound rebound and perhaps extend its prevailing uptrend for a while longer.

Ed Conway of Sky News agrees that the messaging from the Bank today will be just as important as the decision on interest rates….

Hannah Dewhirst, head of campaigns at Positive Money, explains why the group are protesting outside the Bank of England today (see earlier post).

“We’re here to tell the Bank of England that we’ve had enough of senseless interest rate rises.

Rate rises will not bring down inflation being caused by international fossil fuel prices and food prices disrupted by climate change. They will only continue to impoverish households and enrich banks.

What we need are better tools for dealing with inflation than blunt instruments like interest rates, and a windfall tax on bank profits to redress the financial damage done to workers and families by rate hikes.”

Rising interest rates will pile more pain onto borrowers, with mortgage-holders facing large increases in monthly payments when their existing fixed-term deals expire.

But they’re a boon to savers, of course, even though banks have been criticised for being slow to pass on higher rates to savings customers.

Torsten Bell, head of the Resolution Foundation, shows that this impact does not fall evenly across generations, or income groups:

Short-term mortgage rates in the UK are unchanged today, for the second day in a row.

Data provider Moneyfacts has reported that the average 2-year fixed residential mortgage rate today is 6.85%, unchanged from Wednesday and Tuesday’s readings.

The average 5-year fixed residential mortgage rate has dropped slightly to 6.36%, down from 6.37% on Wednesday.

Victoria Scholar, head of investment at interactive investor, agrees that a large, more hawkish, interest rate rise from 5% to 5.5% isn’t out of the question today.

She explains:

With UK inflation still stubbornly high, much more persistent than inflation in the US or eurozone, more work needs to be done to tackle the ongoing price pressures.

Monetary policy is a notoriously blunt tool and is therefore not good at tinkering around the edges. The choice between 25bps and 50bps today is more about signalling how concerned the central bank is about inflation and growth. Late cycle rate hikes tend to work with a shorter lag suggesting a hike at this stage would have a greater economic impact than at the start of 2022.

The post covid supply chain bottlenecks have eased and wholesale energy prices have pulled back. On the other hand, food inflation is still stuck in double digits with supply issues in Russia and India key risks for commodity price inflation ahead. Plus, with wage growth at a record high, labour shortages, and heavy industrial action this year, there’s a resistance to lower wages, which raises the risk of further second round inflationary effects.

Not every investor believes the Bank of England will restrict itself to raising interest rates by just a quarter of one percentage point today, to 5.25%.

Some, such as Steve Matthews, fund manager at Canada Life Asset Management, predict the BoE will deliver another large, half-point rise at noon, taking Bank rate to 5.5%.

Matthews explains:

“Whilst the Federal Reserve and European Central Bank are showing signs that their hiking cycles are close to complete, the picture is far from clear in the UK.

“The decision to hike by 50bps last time around, was based on the stubborn inflation numbers fuelled by wage inflation and suggested that the Bank of England believed greater momentum is required to bring inflation under control.

“It is unlikely that there has been enough time for the last hike to have had a lasting impact and the BoE, wary of being out of sync with the US and Europe, will want to front-load their remaining moves for the greatest impact. With the resident dove, Silvana Tenreyro, leaving the committee there will be a more hawkish tone to the meeting and this could be the deciding factor in what will likely be a split vote.

“Markets have come down a long way from their peak hike expectations but are still pricing in a further three hikes before the end of the year. On balance we agree with this and expect a close call to raise the Base Rate by 50bps and see a September peak of 5.75%.”

The City of London is in a nervous mood ahead of the Bank of England’s interest rate decision at noon.

The FTSE 100 index of blue-chip shares has fallen by 101 points, or 1.3%, in early trading to a two-week low of 7,460 points.

Markets have been roiled by Fitch downgrading the US credit rating on Tuesday evening.

Clifford Bennett, chief economist at ACY Securities, says:

The US is losing its long held safe credit mantle. This is long overdue. Credit agencies are notorious for being slow to act. More may follow. It is simply irresponsible to suggest the USA is a triple A credit.

At AA+, this is still a very generous appraisal for a government which is keenly allowing debt to balloon at an alarming pace. Debt to GDP is likely already well over 130%, but we just haven’t got the data yet. This is a catastrophe. Especially, when the nation involved is continuing to borrow and spend like there is no tomorrow.

The huge leap in government spending on the advent and excuse of Covid, has not been wound back. Instead, debt spending is continuing to grow.

There is no end in sight to the deterioration in the US fiscal position. Now with interest rates alarmingly higher, things are only going to get worse. And quickly.

But there are also concerns over Japan today, where the central bank has launched an emergency bond-buying operation today, after yields (interest rates) on Japanese government debt rose.

Mike Riddell, head of Macro Unconstrained at Allianz Global Investors, is also predicting a quarter-point rise today.

He says:

• We expect the Bank of England (BoE) will hike by 0.25% to 5.25%, rather than 0.5% that was previously feared by markets.

• UK economic growth continues to falter. Higher mortgage rates are starting to weigh on the UK housing market where prices are falling by the most since 2009.

• We believe the BoE will be able to curb growth and drive down inflation. If it does so, the BoE should be in a position to cut rates next year.

Today’s decision on interest rates is unlikely to be unanimous, City economists predict.

There are nine members of the Bank’s monetary policy committee, who all vote on where interest rates should be set.

A majority are expected to vote for a quarter-point rise, to 5.25%. But, RBC Capital Markets predict that as many as three MPC members will vote for a 50bp hike, to 5.5%.

On the other side, though, economist Swati Dhingra may vote for no change. She has opposed earlier interest rate rises this year.

Another rise in UK interest rates would put more pressure on the UK housing market, where prices are already falling at the fastest rate in 14 years (-3.8% in the year to July).

Peter Truscott, chief executive of housebuilder Crest Nicholson, says sales volumes have suffered from rising interest rates.

Truscott told Radio 4’s Today Programme that underlying demand remains “very strong”, but there has been “some pause” in people coming into its offices and reserving homes.

A lot of people are standing on the sidelines….

It’s tending to be volumes which are taking the strain, rather than price. There is a little downward pressure on price.

Deutsche Bank strategist Jim Reid has told clients to expect an interest rate rise of a quarter of one percent at noon, and two more in the coming months too:

Turning to the UK, prime minister Rishi Sunak was reported stating that he felt inflation was not falling as fast as he would like. This came ahead of the BoE monetary policy decision later today.

Our economists are expecting a 25bps hike to bring the policy rate to 5.25% and looking ahead, we see two further quarter point rate hikes, with the terminal rate at 5.75%.

The financial markets currently expect UK interest rates to peak around 5.75% next spring, up from 5% today (well, until lunchtime, anyway).

A month ago, the markets had forecast a higher peak of 6.5%, but expectations have fallen after UK inflation dropped in June.

Julien Lafargue, chief market strategist for Barclays Private Bank, explains:

After pencilling in a peak base rate above 6% a month ago, the market is now anticipating the BoE to stop hiking once it reaches 5.75%. This seems justified at this particular point in time.

We are more sceptical about the market’s view that rates could stay at this level for much of 2024.