The Bank of England is expected to step up its fight against inflation next week, joining about 70 other institutions around the world in raising borrowing costs by half a percentage point, according to Bloomberg.
The move, expected by most analysts and investors, would mark the biggest rise in UK interest rates for 27 years and accelerate a historic shift away from the era of cheap money. Governor Andrew Bailey hinted that the increase would not be the last, saying policymakers were prepared to act “strongly” if necessary to contain inflation.
The BOE was the first of the major central banks to raise interest rates after the pandemic, but it is struggling to keep up with the Federal Reserve, which has made consecutive 75 basis point hikes. Key interest rates now stand at 1.25% for the BOE, 2.5% for the Fed and zero for the European Central Bank.
The move by the UK central bank will increase pressure on contenders seeking to replace Boris Johnson as prime minister. Foreign Secretary Liz Truss has promised tax cuts if she wins the race to lead the ruling Conservative Party. Former finance minister Rishi Sunak says this will push up inflation, forcing interest rates even higher.
With the BOE expecting prices to jump as much as 11% this year, consumers are feeling the sharpest squeeze on living standards in at least two decades and are calling for government help. Even so, a half point rate hike is no longer certain. Recession risks prompted investors to cut bets on a big hike on August 4. They now see a 70% chance of a move of this magnitude, up from almost certain just a week ago.
Source: Capital
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