We forecast that the Central Bank (CBI) Monetary Policy Committee (MPC) will decide to raise the CBI’s policy interest rate by 0.25 percentage points at its next rate-setting meeting, scheduled for 17 November. The CBI’s key interest rate – the rate on seven-day term deposits – will therefore be 1.75% and will have risen by 1 percentage point since the beginning of May 2021. The key rate has already been raised by 0.75 percentage points in three increments.
The economic recovery appears to be moving along at a good clip, even though the recent hiccup in the fight against the pandemic could complicate matters slightly in the short run. At the same time, inflation has been ever more intractable, the short-term inflation outlook has deteriorated steadily, and the breakeven inflation rate in the bond market has inched upwards. Given how close the MPC was to a rate hike of 50bp in October instead of the 25bp ultimately decided upon, and in view of developments since then, we think a 25-point increase is the likeliest outcome now. That said, we do not exclude the possibility of a 50-point rate hike on this final decision date of the year, as the next rate-setting meeting is probably not until early February. It is highly unlikely that the MPC will keep rates unchanged at next week’s meeting, however, in spite of the recent flare-up of COVID-19, as the Committee has shown limited interest to date in chasing the short-term ups and downs of the pandemic.