Written by David Milliken
LONDON (Reuters) – The Bank of England appears poised to raise interest rates by at least half a percentage point on Thursday in an attempt to tame inflation that has hit 40-year highs on the back of a free and depressed currency. Government spending.
Economists polled by Reuters last week had expected the Bank of England to announce at 1200 GMT that interest rates would rise to 2.25% from 1.75%, while financial markets braced for a bigger move to 2.5%.
The Bank of England is also expected to confirm that it will soon sell some of the 838 billion pounds ($944 billion) of government bonds it has bought in more than a decade of quantitative easing – the first major central bank to do so.
The Bank of England’s half-point increase in interest rates last month was the largest since 1995. If the Bank raised rates by three-quarters of a point on Thursday, it would be the biggest rise since 1989, barring a temporary failed attempt to prop up sterling in 1992. .
The US Federal Reserve raised its key interest rate by three-quarters of a percentage point on Wednesday and signaled more significant increases ahead.
The pound fell to its lowest level since 1985 against the US dollar after the Federal Reserve’s decision, and is at its lowest level against a basket of currencies since 2020, which led to a rise in import prices.
Central banks globally have raised interest rates to tackle inflation caused by rising energy prices in the wake of the Russian invasion of Ukraine, as well as supply chain stresses and labor shortages since the COVID-19 pandemic.
The Bank of England was the first major central bank to raise interest rates in the current cycle, which began in December of last year.
Britain’s annual rate of consumer price inflation fell to 9.9% in August from a 40-year high of 10.1% in July, its first decline in nearly a year although still well above the Bank of England’s 2% target and higher in the Group of Seven. .
Futuristic view of mixed blowing
The short-term outlook for inflation is now somewhat better than it was at the time of the last BoE meeting in early August.
New Prime Minister Liz Truss’s caps on household and commercial energy tariffs mean inflation is unlikely to rise as high as the 13.3% peak set by the Bank of England in October, or rates of more than the 15% that economists had forecast in early 2023.
However, the caps – along with potential cuts to taxes on employment, business profits and potential home purchases – amount to more than 150 billion pounds of economic stimulus that was not taken into account in last month’s BoE forecast.
This, in turn, could prompt the BoE to raise interest rates more than previously thought over the next year, although this will remain a significant pressure on living standards from rising inflation.
“Although the immediate risk of a recession has diminished over the coming winter, significant fiscal stimulus increases the risk that high inflation will persist for longer – hence further policy tightening is ultimately needed by the Bank of England,” Sandra said. Horsfield, chief economist at Investec.
Interest rate futures late Wednesday showed that interest rates at the Bank of England reached 3.75% in December and settled at 4.75% from March.
New Finance Minister Kwasi Kwarting will outline more details about the budget plans on Friday, including an update on the debt issuance.
Last month, the Bank of England predicted that the economy would enter a recession in the last quarter of 2022 and contract throughout 2023.
Economists say a recession of this length now seems unlikely, but there is a risk — after the second-quarter contraction and weak retail sales and business survey data since then — that the economy is already in a technical recession.
A public holiday marking Queen Elizabeth’s funeral, after more than a week of national mourning that led to the cancellation of some public events, will also reduce third-quarter production. The Bank of England also decided to delay its policy announcement by a week, which was due to be released on September 15.
(dollar = 0.8876 pounds)