A Bank of England thunderbolt awaits. After postponing its decision after the period of national mourning for the Queen’s death, Threadneedle Street could this week launch the biggest hike in borrowing costs for at least 25 years.
Announcing its plans a day before the Kwasi Kwarteng mini-budget on Friday, the central bank is expected to use a swift and aggressive rate hike to show its commitment to tackling soaring borrowing costs – despite the clouds d gathering storm for the British economy.
City economists believe a 0.5 percentage point hike will be the bare minimum, from the current level of 1.75%, in a seventh consecutive rate hike – the most aggressive tightening cycle since at least. least 1997, when Gordon Brown’s first act as Chancellor gave independence to the Bank. set borrowing costs.
A more severe increase of 0.75 points could however be deployed. Threadneedle Street won’t want to drown in the wake of the US Federal Reserve, with the US central bank set to raise rates sharply on Wednesday after last week’s figures showed a much stickier picture of inflation in the biggest economy of the world.
On this side of the pond, inflation may have fallen in August from 10.1% in July, but remains close to its highest level since 1982 at 9.9% – almost five times the Bank’s 2% target rate – amid rising prices for food and other basic necessities. .
Official figures show unemployment has fallen to its lowest level since 1974, while job vacancies have remained high, giving the Bank an indication of the strength of the economy despite the looming risks of recession. Annual wage growth before inflation – a key measure monitored by the Bank – has increased, even as workers continue to feel the pinch as inflation picks up at a faster pace.
The financial markets estimate at almost 90% the probability that the cost of borrowing will be increased by 0.75 points, an unprecedented increase in the Bank’s 25 years of independence.
“The magnitude of the energy shock we are witnessing is really unlike anything we have seen, so it makes sense that monetary policy is acting in an unprecedented way,” said Modupe Adegbembo, economist at Axa Investment. Managers. “Given market prices for a 75 basis point rise, not delivering that could add to the weakness in the pound.”
Over the summer, the pound hit its lowest level against the dollar in 40 years, reflecting investor unease over the deteriorating economic outlook for the UK. Like other major European currencies, the pound came under pressure from a stronger dollar, as well as worries about skyrocketing inflation amid Russia’s war in Ukraine.
However, in the fierce competition of the currency market, Great Britain is particularly exposed. Investors say Liz Truss increasing government borrowing to fund her £150billion energy support package is not helping matters. Nor are there any threats made in the Conservative leadership campaign to curtail the Bank’s independence.
Details of Truss’ support measures are expected to arrive the next day in the mini-budget. Most economists expect this to help reduce the spike in inflation and lessen the severity of the impending recession by putting more money in households’ pockets.
For the Bank, however, it could mean further interest rate hikes to mop up the inflationary fallout that has fueled the consumer economy. Financial markets expect the key rate to climb above 4.5% by next summer.
All of this is creating a big clash between the government and Bank Governor Andrew Bailey, who has been in Truss’ sights for some time, with a review of the central bank’s mandate expected this fall.
Bailey is unlikely to be sacked, given nervousness in financial markets over Truss’ interference in the Bank’s governance at a time when government borrowing is soaring. But by holding the brakes with higher interest rates, just as Truss is pushing to shake up the economy at all costs, a big battle at the Bank of England is all but guaranteed.