Will Bank of England raise interest rates next week? All eyes on Andrew Bailey as ECB
All eyes are on the Bank of England’s Monetary Policy Committee next week as it faces pressure to raise interest rates.
Next Thursday, mortgage borrowers and savers will find out what the Bank has in store for the base rate.
The European Central Bank, led by Christine Lagarde, voted to increase interest rates by 0.25 percentage points to 2.25 per cent today.
Today marked the first time the ECB has upped interest rates across the eurozone since September 2023.
The ECB became the first central bank in the G7 to raise interest rates as a result of war across the Middle East.
ECB policymakers increased borrowing costs after eurozone inflation rose to 3.2 per cent last month, as the Middle East crisis pushed up energy costs.
Decision time: Andrew Bailey, of the Bank of England, will vote on interest rates next week
The ECB raised its outlook for inflation and cut its growth projections.
It expects headline inflation to average 3 per cent this year, before falling to 2.3 per cent next year.
The central bank expects growth this year of 0.8 per cent and 1.2 per cent next year. Both growth projections are 0.1 percentage point lower than in March.
The ECB said: ‘The war in the Middle East is generating inflation pressures, and the decision to raise rates is robust across a range of scenarios mapping out how the shock might evolve and affect the medium-term outlook for the euro area.’
It added: ‘The outlook remains uncertain, with upside risks for inflation and downside risks for economic growth.’
The ECB said the rate rise meant it was ‘well positioned to navigate the uncertainty caused by the war’ and that it would ‘closely monitor the situation’.
Lagarde told reporters the ECB hiked interest rates because of a ‘major energy shock’ which was lasting longer than expected and was beginning to spill over into the wider economy.
Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, said: ‘The European Central Bank hiked rates today as we expected, preferring to take a cautious stance as they face into this ongoing energy shock.
‘What stood out in particular was the upgrade to core inflation forecasts – with 2026 now running above their prior adverse scenario, showing the clear inflationary nature of this shock and justifying their decision to hike at this meeting.’
Will the Bank of England raise interest rates?
The UK base rate is 3.75 per cent. With the ECB having increased interest rates, all eyes will be on the Bank on 18 June when it votes on its next move. On 17 June, the latest inflation figures will be published.
The UK inflation rate fell to 2.8 per cent in the year to April, according to the latest figures released by the Office for National Statistics in May. Inflation has been above the 2 per cent target for seven of the past 10 years
ONS chief economist Grant Fitzner said the ‘notable fall’ in April’s inflation rate ‘was led by lower electricity and gas prices’.
Analysts broadly expect the Bank to keep UK interest rates on hold next week.
Danni Hewson, head of financial analysis at AJ Bell, said: ‘The majority of the Bank of England’s rate setters are expected to stay firmly on the fence during next week’s MPC meeting, keeping interest rates on hold at 3.75 per cent.
‘Even if next Wednesday’s inflation data shows the anticipated uptick in prices, a sluggish economy, a weak labour market and a boatload of uncertainty are expected to persuade all but the most hawkish members that the best move is no move at all – despite the ECB’s decision to take early action.’
Simon French, chief economist at Panmure Liberum, said: ‘There is an inflationary shock afoot.’
He added: ‘The task facing the Bank of England – as it navigates renewed domestic political risk, and a high inflation legacy – is tricky.
‘At the April MPC, the Committee reasonably argued that financial conditions had been doing much of the heavy lifting – pricing out UK rate cuts in 2026 and replacing them with up to 75bp of rate increases.
‘Retail and commercial credit responded and acted as a near-term suppressant to demand.’
French added: ‘We continue to expect the BoE to hold bank rate throughout the year, but upside risks are growing.’
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