The Bank of England and the European Central Bank are forecast to lift their main interest rates by a half percentage point on Thursday, in what will likely narrow the differential between their rates and that of the U.S. Federal Reserve.
The Bank of England is forecast to take interest rates to 4% from 3.5%, and the European Central Bank is expected to take its main rate to 2.5% from 2%, a day after an expected quarter-point rate rise at the Federal Reserve.
Unlike the U.S., core inflation in the eurozone has been rising — climbing in December to a rate of 5.2% from 5% in November. In the U.K., core CPI stayed at 6.3%. Economists at BNP Paribas estimate that wage growth in the U.K. is at its highest level since the early 1990s.
That said, there’s also data pointing to a slowing economy, particularly in the U.K. where the latest purchasing managers index slumped to its worst level in two years.
European Central Bank officials have pushed back at a Bloomberg News report saying the central bank would dial down the pace of rate hikes after making a 50 basis point increase on Thursday. In December, President Christine Lagarde said that “we should expect to raise interest rates at a 50 basis point pace for a period of time.” At the World Economic Forum in January, Lagarde said the ECB was staying the course.
There’s one more key data point for the ECB — the release of the flash estimate of January inflation, due Wednesday.
Economists for ING say the keep thing to watch in the Bank of England decision is the inflation forecast in the scenario of a “constant rate.” “If these show inflation at, or very close to, 2% in a couple of years’ time, then that would be a sure-fire sign that policymakers think we’re close to the peak for the bank rate,” they said.
The pound
GBPUSD,
-0.14%
has climbed 19% from its September low forged during the crisis over the 2022 mini budget, while the euro
EURUSD,
+0.05%
is up 14% from its September low.
