By Jonathan Cable
LONDON The Bank of England will raise borrowing costs 50 basis points higher than was thought only two weeks ago, in two quarter-point moves, as elevated inflation proves tricker to bring down than had been expected, according to economists polled by Reuters.
Last week, the central bank surprised investors by raising interest rates half a percentage point, taking Bank Rate to 5.00%, and said there had been "significant" news suggesting persistently high inflation in Britain would take longer to fall.
Mortgage rates have already shot up, meaning the 800,000 borrowers who still need to refinance this year, and a further 1.6 million homeowners next year, face much higher repayments.
Bank Rate is now expected to peak at 5.50% next quarter following 25 basis point hikes at the BoE's August and September meetings, medians in the poll taken after the Bank's Thursday move showed.
In a June 14 poll, policymakers were expected to draw a halt at 5.00% next quarter.
"Something has definitely shifted. It's quite hard to reconcile what they said in May with their decision in June so I think they are losing confidence and patience in their models," said James Smith, developed markets economist at ING.
"Are they going to be happy with just one more 25 basis points in August? I suspect not, which is why we have 25 for August and 25 for September and they could even do more."
A cut in borrowing costs was not expected until the second quarter of next year.
Stubborn inflation defied predictions of a slowdown and held at 8.7% in May, official data showed the day before the BoE's decision, and the previous poll suggested it wouldn't be at the 2% target until 2025.
Markets are now pricing in a terminal rate of 6.00% and while that is higher than the poll median, the vast majority of respondents to an extra question, 31 of 34, said the bigger risk to their terminal forecast was that it peaked higher than they currently expect.
Only one economist had a 6.00% peak as their base case.
Over 95% of common contributors to this poll and the June 14 survey, 43 of 45, raised their Q3 forecasts.
Amongst the gilt-edged market makers - primary dealers in UK government bonds - who participated in the latest poll, six had a peak of 5.50%, six said 5.75% and one said 6.00%.
Forty of 52 poll participants said the Bank would dial down the pace to 25 basis points on August 3 but gave a high median 40% chance of another 50 basis point lift.
"I doubt that 50bp increments are the new normal until the greedy inflation beast is tamed, but the central bank signalled its willingness to inflict pain," said Stefan Koopman, market economist at Rabobank. "Going against the consensus helps to strengthen this signal."
(Reporting by Jonathan Cable; polling by Aditi Verma and Anitta Sunil; Editing by Christina Fincher)
