Bank of England poised to raise rates after inflation shock

London, June 22 (BNA): The Bank of England is set to raise interest rates for the 13th consecutive time on Thursday, a day after inflation data came out higher than expected again, with investors divided over the size of the new rate. will be the height.

Economists polled by Reuters last week were unanimous that the Bank of England will raise interest rates to 4.75%, the highest level since 2008, from 4.5%.

But after inflation stabilized at 8.7% in May, investors were expecting a 45% chance that the Bank of England would opt for bigger action and raise interest rates by half a percentage point, even as concerns mount about mortgage holders being hurt and the risk of that happening. recession.

“I think it’s a very balanced decision,” said Thomas Wiladek, chief European economist at US investment firm T. Row Price, who expects at least three of the nine MPC members to vote. .

The British economy, battered by the shock of Brexit as well as the COVID-19 pandemic and a spike in gas prices triggered by Russia’s invasion of Ukraine, has avoided a widely expected recession so far in 2023 although growth appears to be expected to slow. It will be at a minimum of 0.25% this year, according to the Bank of England’s forecast.

Unlike most other large rich economies, output has barely recovered to pre-pandemic levels.

However, inflation readings since the BoE’s last rate hike in May have been higher than expected.

“It’s clear that our inflation problem is a little bit worse than anywhere else,” Charles Bean, former deputy governor of the Bank of England, told BBC Radio, adding that he would vote on a half-percentage-point increase now if he was still in the central bank.

Martin Weale, who was previously in charge of setting interest rates at the Bank of England, said Britain’s weak productivity growth and shortage of workers meant a recession was imminent as interest rates rose.

Households are also now seeing their mortgage bills rise, with the average new two-year fixed rate rising to 6.15% on Wednesday in anticipation of a further hike in interest rates.

Financial markets were estimating that the Bank of England would continue to raise interest rates until they reach 6% – the highest level since 2001 – more than the US Federal Reserve which is seeing a tightening of just a quarter of a point and the European Central Bank which investors expect to move twice as much. .

“The UK has a uniquely bad inflation problem,” said Krishna Guha, vice-president of US investment banking advisory firm Evercore.

Prime Minister Rishi Sunak — who has pledged to halve inflation this year in a bid to win back voter support ahead of national elections expected in 2024 — said he fully supports the Bank of England’s efforts to tame prices.

“I feel a deep moral responsibility to make sure the money you make carries its value,” Sunak will say at Thursday’s event, according to advanced excerpts released by his office.

The central bank predicted last month that consumer price inflation, which peaked at a 41-year high of 11.1% in October 2022, would fall to just over 5% by the end of this year and be below its 2% target for early in the year. 2025.

A significant drop in inflation is almost inevitable given energy prices are down from last year’s highs.

But the Bank of England’s incoming policymaker Meghan Green – who will join the Monetary Policy Committee next month – said last week that raising inflation from 5% to 2% could be a tougher task than the initial drop.

Core inflation – which strips out more volatile prices to show an underlying trend – rose to a 31-year high in May.

Wiladek, who worked at the Bank of England from 2008 to 2015, said wages look set to continue to grow at an annual rate of about 6%, nearly twice the level consistent with the 2% inflation rate, given the shortage of workers available for many employers. .

In previous decades, wage growth in Britain had only slowed after a huge rise in unemployment, and Willadyck estimated that the Bank of England would need to engineer a recession to push unemployment to 6.0%-6.5% from the current 3.8% to make it happen now.

“Unfortunately, the Bank of England is in a position where they have to raise rates until something happens,” he said.

Most economists are less gloomy and believe rates are likely to peak near 5% as recent declines in energy and raw material costs affect prices of other goods and services.

“Market pricing for further price increases can be reversed very quickly – especially if weaker inflation is ultimately allied with easing wage pressures,” Nomura strategists wrote.

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