Will the Bank of England raise interest rates this week?

Odds of rise in UK interest rates on Thursday have been slashed after SVB and Credit Suisse turmoil plus expected drop in inflation

The Bank of England decision on interest rates on Thursday is now on a knife-edge: will they raise rates or not? EPA

The financial tempest that has been blowing through the world's stock markets as a result of the collapse of Silicon Valley Bank (SVB) and the hurried sale of Credit Suisse to UBS will likely mean the Bank of England will temper any rate increase or may even leave interest rates on hold this week.

Also, latest inflation figures due out on Wednesday are predicted to show a fall into single figures for the first time in six months.

It is thought UK inflation will fall to 9.9 per cent, giving the Bank of England some latitude to keep interest rates on hold at 4 per cent.

This would contrast with the European Central Bank (ECB) decision last week to stick to its guns and raise interest rates, even as the Credit Suisse saga was unravelling. However, the ECB had less wriggle room than the Bank of England's interest rate-setting Monetary Policy Committee — inflation in the eurozone has picked up in the past three months.

“Core services CPI [Consumer Price Index] inflation and private-sector wage growth [in the UK] have undershot the Monetary Policy Committee’s forecast, while financial conditions have tightened markedly since the MPC’s last meeting in early February,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

“We think that the committee will vote 6-3 in favour of keeping the bank rate at 4 per cent.”

A raise of at least 0.25 per cent was a near certainty two weeks ago, although the markets now calculate the odds of it happening to be 50/50 at best.

“Heightened financial stability risks with the collapse of Silicon Valley Bank and emerging uncertainty around global banking stability may warrant a more measured response,” said Sanjay Raja, chief UK economist at Deutsche Bank.

Increase in interest rates still likely

Other analysts predict the Bank of England will push ahead with a 0.25 per cent rise in rates, in an effort to stamp on inflation now that it seems to be in decline.

“We currently expect a majority of the MPC to vote for a 25 basis point [0.25 per cent] rise this month,” said Andrew Goodwin, chief UK economist at Oxford Economics.

“Much depends on market movements over the next few days. If markets worsen, a rate rise could be delayed to May or cancelled altogether.”

The Bank of England's MPC will also be watching the US Federal Reserve's latest decision on interest rates, due on Wednesday.

According to the CME FedWatch tool, markets are currently pricing in a 16.6 per cent chance that the Federal Reserve will keep rates on hold, with an 83.4 per cent chance of a 0.25 per cent rise in interest rates.