Slowdown rules out large interest hike: Analysts

The contraction in the UK economy that was revealed this week likely rules out anything more than a small increase in interest rates as the Bank of England sets out its decision today, analysts have said.

The bank’s Monetary Policy Committee is expected to hike interest rates for the fifth time in a row.

It was widely predicted to increase its base rate from 1%, already the highest in 13 years, to 1.25%.

It would be the first time since January 2009 that the rate has been higher than 1%.

Cost of living

Some had even speculated that it might reach 1.5% – a so-called 50 basis points (bps) rise.

But that was before official data showed that gross domestic product (GDP) shrank 0.3%, worse than many had predicted.

It will now fall to the bank’s nine-person committee to decide what is the best outcome. These include Andrew Bailey, the bank’s governor, two deputy governors, Sir Jon Cunliffe and Ben Broadbent, but also Huw Pill, its chief economist.

“April’s GDP data … surely will mean that the internal block – Bailey, Broadbent and Pill – sticks to voting to raise Bank Rate by 0.25% this month,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

Laith Khalaf, head of investment analysis at AJ Bell, said: “The Bank of England faces a stern test of its mettle at the next interest rate decision, and any hesitation is likely to result in the pound being punished on the currency markets.”

Such a drop would mean that the price of petrol and diesel, and other imports that the UK pays for in dollars, would rise. According to a survey commissioned by the Bank of England and performed by Ipsos in early May, 70% of people expect rates to rise over the next 12 months.