Week ahead: City braces for biggest Bank rate hike since independence

The City will this week be bracing for what could be the steepest interest rate rise since February 1995.

London’s premier FTSE 100 index posted a strong performance last week, climbing just over two per cent to 7,423.43 points.

The mid-cap domestically-focused FTSE 250 index, which is more aligned with the health of the UK economy, notched a similarly decent week, advancing around 1.7 per cent to finish above the 20,000 mark.

Traders will be eyeing the Bank of England’s on Thursday where rate setters are expected to lift borrowing costs 50 basis points, something they have not done since the Bank was made independent 25 years ago.

But, most analysts think the Bank will opt for a 25 basis point rise.

Inflation in the UK has surged to a 40-year high of 9.4 per cent, driving the Bank to rein in ultra-stimulative monetary policy. It has already lifted rates five times in a row to a 13-year high of 1.25 per cent.

“We expect the Bank of England to lift rates by 0.5 percentage points in August – taking the Bank Rate to 1.75 per cent,” Sanjay Raja, senior economist at Deutsche Bank said, adding the larger move will be justified by inflationary pressures strengthening since the Bank last met.

New purchasing managers’ indexes (PMI) out tomorrow and Wednesday could show the UK economy is performing better than its international counterparts.

PMIs published last week showed activity shrank in the US and eurozone in July, but expanded in the UK.

Britain’s biggest bank and Asia-focused HSBC published second quarter results tomorrow. Traders will be closely watching for a bump to its net interest income from higher borrowing costs.

Oil giant BP updates markets on Tuesday, with most expecting the firm to follow its Anglo-Dutch counterpart Shell who last week posted a record profit take on the back of surging energy prices.