The BoE Just Hiked Interest Rates To Their Highest Since 2008. Here’s What Could Happen Next.

The Bank of England (BoE) raised interest rates by a quarter of a percentage point on Thursday, taking interest rates to 5.25% – their highest level since 2008. The BoE had previously raised rates by half a percentage point at its last meeting a couple of months ago, and traders saw a 33% chance of a similar move this time around too. But a bigger-than-expected fall in the UK’s inflation rate in June probably gave policymakers the confidence they needed to opt for a smaller move. Let’s put that into perspective, though: even after easing in June, annual inflation in Britain is still running at 7.9% – almost four times higher than the BoE’s target and significantly above that in other advanced economies like the US, Japan, and the eurozone.

Still, Brits seem to be increasingly confident that price pressures will slow in the coming months. A survey published by Citi on Wednesday showed public expectations for inflation in a year’s time had fallen from 5% in June to 4.3% in July. That attitude could reduce workers’ demands for higher wages to better manage the cost of living crisis, which would be big for the BoE: the bank’s repeatedly warned that high wage growth could hinder its inflation-fighting efforts. (See, rising prices of goods and services push employees to demand higher wages, which leads to more spending and higher inflation. This only gets worse as companies raise the prices of their goods and services to offset their own higher wage costs. This loop leads to higher and higher – or “spiraling” – inflation.)

Traders now see interest rates peaking slightly below 5.75%, implying roughly two more quarter-point hikes. Mind you, that might be too conservative. The BoE’s updated forecasts suggest that even if interest rates rise in line with market expectations, it’ll still take until mid-2025 for inflation to fall from today’s 7.9% to the central bank’s 2% target – likely longer than the BoE would’ve hoped. And for traders hoping the bank will cut interest rates soon after they peak, the central bank offered a pretty strong rebuttal, saying that rates will stay “sufficiently restrictive for sufficiently long” to bring inflation back to target. In other words, don’t count on a rate break anytime soon.