Bank of England Set To Raise Rates To 3.5% After Inflation Hits 41-Year High

• The Bank of England looks set to raise interest rates to 3.5% or more next week, but policymakers appear increasingly split on how much tightening is needed to tame double-digit inflation as the economy heads into recession.
• Financial markets currently price in a 78% chance that the BoE will raise rates by half a percentage point to 3.5% on Dec. 15, and a 22% chance of a rise to 3.75%. The market is currently expecting BoE rates to peak at 4.75% by the middle of next year, while HSBC expects the BoE to stop at 3.75% in February and Investec predicts a peak of 4%.
• The central bank's immediate concern is British consumer price inflation, which hit 11.1% in October, the highest reading since 1981 and more than five times the BoE's 2% target, up from 4.2% a year earlier.
• While much of the increase has been driven by higher energy prices following Russia's invasion of Ukraine, the BoE fears labour shortages and other bottlenecks caused by the COVID-19 pandemic and Brexit could make inflation slow to fall.
• On Nov. 3, the BoE estimated Britain had entered a recession that would last until the end of next year and shrink output by 1.7% - a bigger drop than more recent forecasts, and one which partly reflects elevated market rate expectations at the time the forecasts were made.

(Source: Reuters)