As inflation rises, the Financial institution of England plans its largest price hike in 27 years

LONDON, Feb 3: Bank of England Governor Andrew Bailey is stepping down after a press conference at the Bank of England 2022. February 3 in London, England. The bank is expected to raise interest rates for the fifth consecutive meeting on Thursday, but faces a difficult balance between supporting growth and curbing inflation.

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LONDON – Bank of England Interest rates are widely expected to rise by 50 basis points on Thursday, the biggest increase since 1995.

The move would push borrowing costs up to 1.75 percent as the central bank battles soaring inflation, and would be the first half-point increase since the rate hike in 1997. it was independent of the British government.

UK inflation hit a new 40-year high of 9.4% in June. as food and energy prices continue to rise, deepening the country’s historic cost-of-living crisis.

Bank of England Governor Andrew Bailey suggested hawk language July 19 so that the Monetary Policy Committee could consider a 50 basis point hike, promising that there would be no “ifs or nots” in the Bank’s commitment to return inflation to the 2% target.

A A Reuters poll was conducted last week indicated that more than 70% of market participants now expect a half-point rise.

James Smith, developed markets economist INGsaid that although the economic data from June The 25 basis point increase has not moved significantly past the MPC’s commitment to act “coercively” to reduce inflation, and markets are more or less pricing in 50 basis points at this point. , means that policymakers can err on the aggressive side.

“Nevertheless, the window for further rate hikes appears to be closing. Markets have already cut expectations for the Bank’s “top” interest rate from 3.5% to 2.9%, although that still means two more 50 basis point rate hikes by December and a bit more to come. after that,” Smith said.

“It still looks like a stretch. We’ve been aiming for a top bank rate of 2% (currently 1.25%), which will mean just one more 25 basis point rate hike in September before policymakers stop tightening.”

He admitted that in practice this could be an understatement and, depending on the signal the bank sends on Thursday, ING would not rule out further hikes of 25 bps or at most 50 ps.

Smith said the key points to look out for in Thursday’s report will be whether the bank continues to use the word “force” and forecasts that will feed market expectations into the bank’s models and expected policy trajectory.

If forecasts show, as they have in previous iterations, that unemployment and inflation will rise well below target two or three years from now, markets could predict more gloomy news.

“Everybody takes that as a sign that they’re saying, ‘OK, well, if we do what the markets expect, then inflation will be below target,’ which is a very indirect way of saying ‘we don’t need to.’ rise as aggressively as the market expects,” Smith told CNBC on Tuesday.

“I think it’s going to happen again, hopefully, and that should be seen as some kind of sign that we’re coming to the end of the tightening cycle.”

Growing up worries

A more aggressive approach to Thursday’s meeting would bring the bank’s monetary policy tightening trajectory closer to the bank’s established trend. US Federal Reserve and European Central Bankwhich 75 implemented and Up 50 basis points last monthrespectively.

But while it may bolster the bank’s credibility in the fight against inflation, a faster pace of tightening will add downside risks to an already slowing economy.

Berenberg senior economist Kallum Pickering said in a statement on Monday that Governor Bailey was likely to go to the nine-member MPC if he agreed to a 50-basis-point hike on Thursday, and predicted that the bank would add another if inflation was still rising. 50 bp in September.

“The outlook beyond is uncertain. Inflation is likely to peak in October when the household energy price cap rises again. With growing evidence that tighter monetary conditions are weighing on demand and core inflation, we expect the BoE to hike another 25 basis points in November. but pause in December.” , Pickering said.

Berenberg expects the Bank Rate to reach 2.5% in November, up from 1.25% currently, although Pickering said the risks to that call are on the upside. He suggested that the BOE in 2023 could replace some of the tightening as inflation starts to pick up, and is likely to cut the Bank Rate by 50 basis points next year, and in 2024 – another 50 basis points.

The rise of the upper limit of energy prices

Britain’s energy regulator Ofgem has increased the energy price cap by 54% since April in a bid to adjust to soaring global costs, but it is expected to increase further in October, with annual household energy bills rising. predicted exceed £3,600 ($4,396).

Barclays has historically been cautious about bank rates and a big believer in the MPC’s “early and gradual” strategy. But the UK’s chief economist, Fabrice Montagne, told CNBC in an email last week that policymakers now need to act “with force” as energy prices continue to rise.

“Rising energy prices in particular contribute to our forecast for Ofgem’s price cap and will force the BoE to revisit its inflation forecast. Higher inflation for even longer is a scenario that scares central banks for more persistence and spillovers,” he said.

The British banking giant now expects a rise of 50 basis points on Tuesday, 25 basis points in September and 2% thereafter.

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