U.K. Economists Join Markets in Forecasting December Rate Hike

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U.K. economists have become more hawkish over the past month and now expect the Bank of England to increase interest rates in December as concerns about inflation intensify.

A month ago, economists predicted the central bank would maintain its benchmark rate at a record-low 0.1% until May. Now they expect an increase to 0.25% next month, according to a Bloomberg survey published Monday. That would make the U.K. the first major economy to lift borrowing costs since the pandemic. 

The poll was carried out in the week following Nov. 4, when BOE officials warned of the need to raise rates in the coming months to return inflation to their 2% target. Markets were already pricing in a quarter-point hike by year-end and have added to their bets since then.

For policy makers, the labor market is likely to prove the deciding factor. Recent surveys suggest shortages of workers are worsening and driving up wages. The BOE is concerned those pressures could spread inflation across the economy if left unchecked.

The missing piece of puzzle is clear evidence of what happened to about 1 million furloughed workers when the government stopped subsidizing their wages on Oct. 1. Early indications are that the vast majority returned to work instead of joining the ranks of the unemployed.

Rising energy costs are expected to push inflation to a peak of 4.3% in the second quarter of next year, higher than previously forecast, according to the median estimate in the Bloomberg poll. However, that’s below the 4.8% predicted by the BOE, and the survey paints a slightly weaker picture in other respects too. 

The projections imply the economy will return to its pre-crisis size in the second quarter of 2022 after growth fell short of forecasts between July and September partly due to supply disruptions. The BOE predicted that milestone would be reached in the first quarter. 

Analysts also see the end of the furlough program having a bigger impact, with unemployment set to reach 4.8% this quarter instead of the 4.5% forecast by the BOE –- a difference of over 100,000 people.
 
In the view of economists, the central bank’s key interest rate is set to rise only gradually, reaching around 0.75% by early 2023, the forecasts show. That’s about a half percentage point below what’s priced in by financial markets.  

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