Goldman Sachs has predicted the Bank of England could hike interest rates to five percent this summer as Britain struggles to reduce the highest inflation rates among the G7 advanced economies.
It is anticipated the cost of borrowing for households and businesses will rise to 4.5 percent on Thursday, May 11.
However, the investment bank cautions the borrowing costs may climb higher as the central bank strives to reduce the highest inflation in 40 years to more manageable levels.
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UK inflation stands at 10.1 percent, higher than expected after falling less than expected in March, and represents the fastest annual rise in food and drink prices since 1977.
A persistently high inflation rate may continue to pressure households amid the current cost-of-living crisis.
It might also be worrying for the government, especially after Rishi Sunak’s obligation to cut inflation rates in half this year.
When he made the pledge, the inflation rate was 10.7 percent.
Goldman Sachs says although UK inflation is expected to fall quickly, it is unlikely to drop enough to meet the Bank’s government-set target of two percent.
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Ibrahim Quadri, an economist at the US investment bank, said: “While it is possible that the [Bank’s rate-setting] monetary policy committee might want to slow the hiking to a quarterly pace after the May meeting, we remain sceptical that this will be feasible amid ongoing inflationary pressures.”
He expects the monetary policy committee to continue raising rates in 25 basis point increments until they hit a terminal rate of five percent in August.
Some economists believe the Bank of England may pause its rate-hiking cycle after this week’s meeting.
Central banks worldwide have increased borrowing costs significantly to combat soaring inflation after the Covid pandemic and Russia’s war in Ukraine.
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In the US, investors are betting that the Federal Reserve may be forced to cut rates this year due to the fallout from the worst banking crisis since the 2008 crash.
The Fed raised rates from 5 to 5.25 percent last week, but the US economy has proven resilient recently.
In April, employment rose by a stronger-than-expected 253,000.
The likely increase in the Bank of England rate comes as households and businesses across the UK face growing pressure from past rate hikes.
Millions of borrowers who fixed their mortgages and loans at lower rates are reaching the end of these deals.
Approximately 1.4 million households’ fixed-rate mortgages are set to expire this year.
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