Markets Prepare For What Could Be The BoE's Final Rate Hike This Cycle

The Bank of England is deciding on its next interest rate decision this week. Figure 1 shows the historical rates since 2000.



BoE Historical Interest Rates (2000-2023)


Figure 1: BoE Historical Interest Rates (2000-2023), Source: TradingEconomics



Markets are expecting two possible scenarios. First, that the central bank raises interest rates by 25 bps to 5.5% for the 15th time in this tightening cycle. This would likely be the final hike before the BoE halts the cycle. A hiking decision would be driven by insistent inflation that is still well above the BoE’s 2% target.


However, inflation recently fell unexpectedly to 6.7% in August, its lowest level since February 2022, compared to projections of +7%. Meanwhile core inflation, which excludes the most volatile price components, fell to 6.2% from 6.9% in July. The Reuters poll had pointed to a reading of 6.8% in August. This unexpected decline opens the floor to scenario two, that the central bank pauses interest rates to end its hiking cycle this month. The latest figures brought some respite for Prime Minister Rishi Sunak who promised to halve inflation before 2024.


The Office for National Statistics announced that the decline was mainly attributed to a decline in hotel prices and airfares and by food prices increasing by less than the comparable period last year. The rising price of oil and potential increases in global food prices could slow down the current decline in inflation and even cause inflation to start rising again, adding leeway for the BOE to continue tightening.


The Bank of England's next interest rate decision is a key event for markets. A hike could pressure some stock prices, as it would increase the cost of borrowing for companies. However, a rate rise could also lead to higher earnings for some companies and boost their stock prices. The response to the BoE’s decision across stocks ultimately depends on the sector and its elasticity to interest rates.




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