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City braces for sharp hike in UK interest rates

Pressure is building on the Bank of England (BoE) to hike UK interest rates sharply this week, as it faces the highest inflation rate in decades and a government keen to cut taxes to stimulate the economy.

The money markets are pricing in a 75 basis-point hike on Thursday (22 September), which would be the biggest rise in over 30 years and would lift the UK base rate from 1.75% to 2.5%. Traders are also anticipating large rate rises at the BoE’s meetings in November and December, taking the base rate to 3.75% by Christmas.

Investors say the weak pound could force the BoE to act aggressively. Katharine Neiss, chief European economist at PGIM Fixed Income, said: “With the UK economy weakening, there is a case to be made for the Bank of England to stay focussed on the medium-term outlook for inflation and on replenishing its toolkit. This would speak to continuing with its measured pace of tightening, alongside a well-telegraphed active run-off of its balance sheet.

“But with inflation continuing to rise and the prospect of a sizable fiscal expansion on the horizon, there are many that would argue for a more aggressive rate rise at the BoE’s next policy meeting.”

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