The Bank of England will raise interest rates for the tenth time in succession at its policymakers’ meeting this week to further squeeze the finances of businesses and mortgage holders.
Financial markets anticipate a 0.5 percentage-point increase in the base rate of the central bank to 4%. This is its highest level since 2008’s financial crisis. This follows nine rate increases by the Bank’s Monetary Policy Committee (MPC), since December 2021.
The Bank is facing a delicate balance act between pushing high inflation out of the system and the risk of its actions exacerbating an economic downturn.
Most economists polled by Reuters expect one more rate hike this week – to 4.25% in March – but financial markets see the tightening cycle ending at 4.5% in the middle part of the year.
Threadneedle Street stated late last year, that Britain was on the verge of a prolonged recession due to the cost of living crisis. Inflation rose to 11.1% in October due to an increase in energy costs and the rising cost of weekly shopping, but it fell slightly to 10% in December.
Economists suggest that cooling inflation might help ease the Bank’s desire to raise rates. After a decades-long campaign to combat inflation, the central bank expects to be near its maximum for driving up borrowing costs.
Official figures, however, showed a stronger-than-expected performance for growth in the gross domestic product in November and signs of resilience in the jobs market.
This comes at a time when rate rises are increasing pressure on households. As many as 2.7 million homeowners with short-term fixed rates mortgages will be paying at least £100 per month more to refinance at higher rates.
Analysts believe that the Bank’s nine-member MPC will be divided on Thursday. Some members may push for a stronger stance on raising interest rates than others. This is due to uncertainty over how much inflation will fall this year.
In December, the MPC split in three, with two members, Silvana Tenreyro, and Swati Dihinga, voting to end rate rises, while Catherine Mann supported a larger 0.75 percentage points move.
Andrew Bailey, the Bank’s Governor, stated earlier this month that there could be a rapid drop in inflation this calendar year following a recent drop in wholesale energy prices. However, he also warned that there could still be a significant risk from shortages in workers throughout the economy.
Economists predict that the Bank will reduce its forecast for inflation to end the year at 3-4pc, down from a prior forecast of 5%.
Paul Hollingsworth is the chief European economist for Europe at the French bank BNP Paribas. He stated that “we still believe the end of this tightening cycle” We expect that the MPC will shift away from increasing rates and instead emphasize the fact that rates must remain at high levels for a long period of time to reduce underlying inflation.
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