Bank of England set for second hefty rate rise in a row By Reuters
Economy 1 hour ago (Sep 22, 2022 00:15)
© Reuters. FILE PHOTO: General view of the Bank of England in London, Britain, October 22, 2021. REUTERS/Tom Nicholson/File Photo
By David Milliken
LONDON (Reuters) – The Bank of England looks set to raise interest rates by at least half a percentage point on Thursday in a bid to tame inflation that is just off a 40-year high, against a backdrop of a tumbling currency and a free-spending government.
Economists polled by Reuters last week expect the BoE to announce at 1200 GMT that rates will rise to 2.25% from 1.75%, while financial markets have priced in a bigger move to 2.5%.
The BoE is also expected to confirm that it will soon sell some of the 838 billion pounds ($944 billion) of government bonds which it bought during more than a decade of quantitative easing – the first major central bank to do so.
The BoE’s half-point increase in rates last month was its biggest since 1995. If it raises rates by three-quarters of a point on Thursday it would be the largest hike since 1989, barring a failed, temporary attempt to shore up sterling in 1992.
The U.S. Federal Reserve increased its main interest rate by three-quarters of a percentage point on Wednesday and signalled more large increases to come.
Sterling sank to its lowest since 1985 against the U.S. dollar after the Fed decision and is at its lowest against a basket of currencies since 2020, pushing up the price of imports.
Central banks globally have been hiking rates to tackle inflation caused by the surge in energy prices following Russia’s invasion of Ukraine, as well as supply-chain pressures and labour shortages since the COVID-19 pandemic.
The BoE was the first major central bank to raise rates in the current cycle, beginning in December last year.
Britain’s annual rate of consumer price inflation edged down to 9.9% in August from a 40-year high of 10.1% in July, its first drop in nearly a year though still far above the BoE’s 2% target and the highest in the Group of Seven.
MIXED INFLATION OUTLOOK
The short-term outlook for inflation is now somewhat better than at the time of the BoE’s last meeting in early August.
New Prime Minister Liz Truss’s caps on household and business energy tariffs mean inflation is unlikely to rise as high as the 13.3% peak the BoE had pencilled in for October, or rates of more than 15% which economists expected for early 2023.
However, the caps – combined with likely cuts to taxes on employment, business profits and potentially house purchases – amount to more than 150 billion pounds of economic stimulus that was not factored into the BoE’s forecasts last month.
This, in turn, could prompt the BoE to raise rates more than previously thought over the coming year, despite what will still be a big squeeze on living standards from high inflation.
“Although the immediate risk of recession over the coming winter is diminished, substantial fiscal stimulus adds to the risk of high inflation being maintained for longer – and hence the chances of, ultimately, substantially more policy tightening by the Bank of England being required,” Investec economist Sandra Horsfield said.
Interest rate futures late on Wednesday showed BoE rates reaching 3.75% in December and plateauing at 4.75% from March.
New finance minister Kwasi Kwarteng will set out more details of the budget plans on Friday, including an update to debt issuance.
Last month, the BoE forecast the economy would enter recession in the final quarter of 2022 and shrink throughout 2023.
A recession of this length now looks unlikely, economists say, but there is a risk – following contraction in the second quarter and weak retail sales and business survey data since – that the economy is already in a technical recession.
A public holiday to mark Queen Elizabeth’s funeral, following more than a week of national mourning that led to the cancellation of some public events, will also reduce third-quarter output. The BoE also decided to delay by a week its policy announcement, which had been due out on Sept. 15.
($1 = 0.8876 pounds)
Bank of England set for second hefty rate rise in a row
DUBLIN (Reuters) – Irish consumer sentiment tumbled to levels last seen during the global finance crisis 14 year ago as concerns about the impact of sharply higher energy bills…
By Howard Schneider and Ann Saphir WASHINGTON (Reuters) -Federal Reserve Chair Jerome Powell vowed on Wednesday that he and his fellow policymakers would “keep at” their battle to…
LONDON (Reuters) – Britain’s health minister on Thursday will set out a plan to cut waiting times for doctors’ appointments by using pharmacies and volunteers to alleviate…
© 2007-2022 Fusion Media Limited. All Rights Reserved.
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.