(Bloomberg) --
The market rout that followed the UK’s fiscal event last week will prompt the Bank of England to raise interest rates by 100 basis points, potentially at an emergency meeting, according to Bloomberg Economics.
The dramatic selloff sparked by Chancellor Kwasi Kwarteng’s program of debt-funded tax cuts continued Monday, pushing the pound to a record low against the dollar and prompting calls from former officials and analysts for drastic BOE intervention.
Bloomberg Economics’s SHOK model suggests the drop in the trade-weighted pound since August could add a further 0.7 percentage point to inflation over the course of next year, with the impact lingering into 2024.
The plunge “will set alarm bells ringing at the central bank,” Senior Economist Dan Hanson wrote Monday. “If the drop sticks, the BOE’s next move, which could easily come in an emergency meeting, will likely be a 100 basis-point hike.”
Read More: UK INSIGHT: Market Meltdown Will Push BOE Toward 100-Bp Hike
Markets are currently pricing in 150 basis points of hikes by the bank’s November meeting -- an amount that could suggest bets on some emergency action. The BOE may prefer to refrain from such a move to avoid explicit criticism of the government’s policies, and instead choose to ramp up hawkish rhetoric in coming days, Hanson wrote.
“An emergency rate hike would be a damning indictment of the government’s strategy, but it will become increasingly likely if markets fail to stabilize,” he said. “One reason to wait is to give the government the opportunity to respond.”
©2022 Bloomberg L.P.
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