Bank of England warns of biggest interest rate rise in 27 years

Governor Andrew Bailey of the Bank of England suggested that they are poised to announce the largest increase in interest rates in almost 30 years. This was after he rebuffed a barrage of criticisms from Tory leadership candidates.

Mr Bailey stated that rate-setters had put a 50-basis point increase “on-the table” for the August meeting. This signal is the strongest yet that the Bank will intensify efforts to reduce inflation from its 40-year peak.

Last night, the Governor also defended the Bank of England and warned that its independence was “now more important than ever” after unprecedented criticisms from Prime Minister hopefuls.

After inflation reached a 40-year-high of 9.1pc, the Bank’s Monetary Policy Committee voted for five consecutive increases. This raises the base rate from 0.1% to 1.25pc post-financial crises.

However, Mr Bailey indicated that the Bank could accelerate the rate of rising from 25 basis points to 50 in a move that would be the largest since 1995 before independence.

According to Moneyfacts data, a 50 basis point increase would add nearly £70 per month to the cost of a typical £250,000 mortgage at an average five-year rate.

At the Mansion House financial service dinner, he stated that if we see signs of greater persistence in inflation, and price or wage setting would be such indicators, we will need to take action. This means that we will have to choose between a 50 basis points increase and a corresponding decrease in price.

Bailey stated that a higher rate increase is not “locked in”, as there are increasing risks that inflation will be higher than anticipated.

Markets predict that interest rates will reach almost 3% by 2022. This will increase mortgage costs for millions of homeowners, and drive up borrowing costs for businesses.

The Governor stated that reverse quantitative easing sales could begin as early as September. He also suggested that the Bank could reduce the number of gilts it holds to £100bn within the first year.

Many Conservative leadership contenders have criticized the Bank of England for the rise in inflation, as food and energy prices soar. Some claimed that the Bank of England’s bond-buying spree under quantitative easing had contributed to inflation. Foreign Secretary Liz Truss is the favourite to succeed Boris Johnson. She has indicated that she will reexamine the Bank’s mandate to make sure it is strong enough.

In his speech, Mr Bailey defended the Bank and its remit following the attack. He claimed that the “Russian shock” is the main contributor to UK inflation.

He stated that “These are the most challenging times for the monetary policy regime inflation targeting we have seen in the last quarter century since 1997 when the MPC was established.”

“That does not necessarily mean that the regime is failing. It is far from the truth. This regime was created for times like these. The central bank independence that was the foundation of the regime is crucial now more than ever. Any regime’s worth is measured in difficult times, not the pleasant.

Nadhim Zahawi, Chancellor of the European Union, made his first major speech at Mansion House to pledge that he would seize the benefits of Brexit by revoking EU rules governing financial services, including the controversial Solvency 2 rulebook.

He stated: “The British people are able to rest assured that we’re getting on and delivering benefits of Brexit …. [We]ll unleash growth across the financial services sector, and will allow us to unlock tens and billions of dollars of investment in the UK economy.”

Zahawi confirmed that there was a “call-in power” which would allow ministers to reverse financial watchdogs’ decisions if they threatened to impede reform.

The Treasury announced new plans to make it easier to raise funds in the UK for listed companies as part of wider reforms to improve the City of London after Brexit.

Mark Austin, a partner at City firm Freshfields, led a government-backed review that suggested companies make it easier to tap investors for money by removing costly prospectuses from most secondary fundraisings.

Austin also suggested that all capital raisings should include retail investors who were historically excluded.

These reforms will boost the Square Mile as well as make the London Stock Exchange more appealing to fast-growing companies.

The City watchdog supported the overhaul and stated that Mr Austin’s recommendations were in line with their “strategic priority” to keep the UK wholesale markets as a top global market for investors, intermediaries, and issuers.

These recommendations were also supported widely by institutional investors like BlackRock and Abrdn.

Austin stated that the proposals made today were designed to increase international competitiveness and support growth ambitions for companies already listed on UK capital markets.

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