A watershed six weeks took at least some of the heat of the UK monetary policy debate in the run-up to Thursday’s interest rate decision.

When the BoE’s nine rate-makers last met, in early November, they were hard-pressed to restore confidence in the UK’s economic management, after the market turmoil unleashed, to hastily reverse the “mini” budget. Heavy tightening by the European Central Bank and the US Federal Reserve.

duly Delivered An interest rate increase of 0.75 percentage point – the largest in more than 30 years – which brought the benchmark interest rate to 3 percent.

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Now, the gold markets have calmed down. Prime Minister Rishi Sunak has set fiscal policy on a more conventional path. There is a chance that both the Federal Reserve and the European Central Bank will slow down interest rate hikes this week.

So did the Bank of England. Investors are betting that the Monetary Policy Committee will choose to raise interest rates by 0.5 percentage point, rather than repeat last month’s huge move. “Our sense is that the majority see November’s 75 basis point move as an exceptional step rather than the start of a new normal,” said Paul Hollingsworth, economist at BNP Paribas.

But with the UK facing the worst growth outlook of any major economy, and some of the most persistent inflationary pressures, the decision will be nicely balanced.

Analysts said there is a possibility of a three- or even four-way split in the committee. More hardline members – such as Dave Ramsden and Jonathan Haskell – have argued that hardening should be preloaded. inflation Expectations are under control and you could vote for a larger increase.

On the other hand, Silvana Tenero has argued that the Bank of England has already done enough to bring inflation below target, once the full impact of its latest tightening is felt, and Swati Dhingra has suggested that any further increase in borrowing costs will unnecessarily deepen and prolong the impending recession.

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while, Andrew BaileyThe BoE governor made it clear that “there will be more to do” to put inflation – which hit 11.1 per cent in October – on a sustainable path. He’s been less clear about how quickly or how far interest rates will rise, but when confronted by his predecessor, Mervyn King, he admitted that the Bank of England views a recession as “an integral part of the process needed to get inflation back to . . 2 per cent on a basis.” sustainable.”

Developments since the last MPC meeting provide food for both the doves and hawks in the committee.

There is some evidence to suggest that general inflation has now peaked – with oil prices falling, sterling rising, and surveys showing that companies are becoming less confident in their ability to raise prices.

But there are now signs of strong wage growth starting to push up prices for services — a worrying development for the Bank of England because it suggests inflation may not fall enough even after the effects of the pandemic on supply chains and Ukraine’s war on energy prices disappear.

The contraction in GDP so far has been less than the Bank of England had projected, and while Chancellor Jeremy Hunt has announced a significant tightening of fiscal policy, it is unlikely to change the Bank’s thinking as the pain will mostly be felt after the next election, due by 2025.

“There is plenty of scope for further disagreement among MPC members,” said Paul Deales of Capital Economics, a consultancy, who believes the committee is likely to opt for a smaller rate hike this week and noted that it is “nearing the end”. of the tensile cycle.

Two key data releases early this week – the latest inflation reading and official figures on the state of the labor market – have the potential to swing the vote.

The biggest concern for the BoE is that chronic labor shortages – caused in part by increased inactivity among older workers – will force employers to raise wages at a pace that will keep inflation high, if they also try to maintain their margins by raising prices to Rewards.

“We’ll have to raise interest rates more than we’re raising to counter that,” Bailey told the House of Lords Economic Affairs Committee last month, while pointing to early signs of easing employment pressures.

Whether the MPC decides to increase the forward loading rate, or act more cautiously, the critical question is how far it will go in the end. Last month, the committee gave unusually clear direction that investors had gone too far in betting that interest rates would rise to 5.25 percent next year. It may be less obvious now that investors backed off, as current market rates point to a peak of just over 4.5 percent.

But analysts believe the direction of travel will remain clear. “We think the overall message is likely to be that the MPC is not over yet,” Hollingsworth said.