Bank of England prepares to raise interest rates again as uncertainty swirls

Bank of England Governor Andrew Bailey arrives to speak at the Bank of England Monetary Policy Report Press Conference in London, UK, November 4, 2021. Justin Tallis / Pool via REUTERS

March 17, 2022

By Andy Bruce

LONDON (Reuters) – The Bank of England appears poised to push up interest rates on Thursday as it tries to stem rising inflation by consolidating in the British economy.

All but five of the 49 economists who took part in a recent Reuters poll believed that the BoE would raise the bank rate for the third straight session, back to the pre-pandem level of 0.75%, with the rest expecting it to remain waiting at 0.5%.

The BoE last month forecast inflation to peak at around 7.25% in April – almost four times the British central bank’s 2% target – but that forecast has been surpassed by seismic changes in post-Russian European energy markets. invasion of Ukraine.

Investors will be watching every new thought from regulators about how – like central bankers elsewhere – they plan to deal with the competitive forces of price pressures and a slowdown in economic growth that could even turn into a recession.

The US Federal Reserve raised interest rates by a quarter of a percentage point on Wednesday and unveiled an aggressive plan to push borrowing costs into restrictive levels until next year as worries about high inflation and the war in Ukraine outweigh the risks. of the coronavirus pandemic. .

The European Central Bank, which is behind the BoE and the Fed in reversing the pandemic, agreed last week to stop raising money in the markets this summer, paving the way for possible interest rate hikes in 2022.

“The war in Ukraine means that inflation in the UK will remain higher for longer,” said ING economists James Smith and Chris Turner. “Markets have come to the conclusion that this means that the BoE will double its tightening plans.”

A Reuters poll of economists released on Tuesday found that inflation in the second quarter averaged nearly 8%, the highest level since the early 1990s.

All nine members of the Monetary Policy Committee expected most economists to vote in favor of raising interest rates, but there could again be a dichotomous vote on the extent of the tightening required.

Last month, a small majority of five, including Governor Andrew Bailey, voted in favor of raising interest rates by 25 basis points instead of raising them by 50 basis points. Faster action risked raising market expectations for future interest rate hikes that were already sufficient to push inflation well below the target in the coming years, they said.

These market bets have risen in the last month and now show a bank interest rate of 2% by the end of next year.

Paul Hollingsworth, chief European economist at BNP Paribas, said he believed growth concerns would come to the fore later this year, “suggesting that six-year rising market prices are far from over.”

The four MPC members who voted in favor of raising interest rates by 50 basis points last month are worried that high inflation was likely to take root in price and wage expectations between businesses and consumers.

Last month’s data brought mixed news to this front.

Public expectations for inflation rose to new multi-year highs, according to surveys, as the labor market remained hot.

However, a BoE report last week highlighted weak forecasts for wage increases among households, which were embarrassed by Governor Bailey last month’s call for restraint in demanding wage increases.

As investors also look forward to a budget update next Wednesday by Finance Minister Rishi Sunak, the British Chambers of Commerce said economic policymakers should be wary of an increased risk of recession.

“Rising interest rates and taxes at this time will further weaken the UK’s growth prospects, undermining confidence and reducing household and business finances,” said Suren Thiru, chief financial officer at BCC.

(Report by Andy Bruce, Edited by William Maclean)

Bank of England prepares to raise interest rates again as uncertainty swirls

Source link Bank of England prepares to raise interest rates again as uncertainty swirls

Back to top button