BoE is expected to biggest rate rise for more than 25 years

BoE is expected to biggest rate rise for more than 25 years

Source: Financial Times

Bank of England policymakers will be under pressure to step up the pace of monetary tightening when they meet this week, following the lead set by the European Central Bank and US Federal Reserve. Andrew Bailey, the BoE governor, has made it clear that while a 0.5 percentage point increase in interest rates is “not locked in”, it will be “among the choices on the table” when the monetary policy committee makes its policy decision on Thursday. The BoE has raised interest rates in 0.25 percentage point increments since December but pledged in June to act “forcefully” if needed in response to more persistent inflationary pressures. If the MPC follows though, raising the central bank’s benchmark rate to 1.75 per cent, it will be the sharpest increase in borrowing costs for more than quarter of a century. Analysts say the decision will be finely balanced, as policymakers weigh relentless inflationary pressures against the rising risks of recession. But a growing number of forecasters think the balance of opinion on the MPC will swing in favour of the first 50 basis point rise since its independence. “After the ECB and the Fed delivered oversized hikes at their July meetings, the Bank of England is likely to feel similar pressure,” said Amarjot Sidhu, an economist at BNP Paribas, while Philip Shaw at Investec said the BoE “may fear a credibility problem if it is perceived to be lagging behind its peers”.

The IMF, which slashed its global growth forecasts this week, pointed to the UK as one of the countries where the outlook for inflation had worsened most. It urged policymakers to take “decisive action” even if it hit growth, jobs and wages in the short term — arguing that a gradual approach would simply lead to a more disruptive adjustment later.

“If the BoE continues to rise by 25 basis points per meeting, it would be outpaced by most other central banks,” said Fabrice Montagné, economist at Barclays, adding that the pound’s 3 per cent depreciation since April reflected a perception by markets “that the UK is falling behind”.

Inflation, which reached 9.4 per cent in June on the CPI measure targeted by the BoE, has so far risen largely in line with the central bank’s May forecasts. But the latest surge in gas prices means the BoE’s new projections are likely to show it climbing even further into double digits than was already expected in the autumn when the cap on regulated energy prices will rise again.

The MPC cannot do anything about high energy prices, but it will worry about the knock-on and potentially lasting effects on business and household behavior — which it can influence.

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