(Picture: PA Wire)
TWO of the most powerful central banks in the world are poised to put up interest rates this week as they battle runaway inflation – but there are warnings that could just cause further turmoil to economies battered by the Ukraine war.
With Chancellor Rishi Sunak under pressure to come to the aid of households about to be biffed by soaring energy prices, the Bank of England and the US Federal Reserve seem certain to raise borrowing costs.
On Wednesday the Fed is expected to put rates up by 0.25 points, its first increase since the pandemic began.
On Thursday, the Bank could put rates up by 0.5 points in one go, taking base rate to 1%. While that is still low by historical standards, it represents a sudden jump likely to unnerve businesses looking to borrow or invest.
Markets think rates will go to 2.25% in the UK and 2.5% in the US by next year.
Some economists say these rate rises will be futile in the fight against inflation, since it is largely caused by global events and chaos in the energy markets.
Stagflation – rising inflation and declining economic growth – looks increasingly likely.
Capital Economics said: “We think the Monetary Policy Committee is sufficiently worried that higher inflation is feeding into price and wage expectations to raise bank rate…the big questions is how does the war in Ukraine and its economic consequences influence the speed and extent of interest rate rises?”
There could be tension on the MPC over this. Capital says: “Some MPC members may put more weight on the downside risks to GDP growth and, for fear of adding to the already sizeable headwinds facing the economy, conclude they don’t want to raise rates as quick or as far as they previously intended.”
The Resolution Foundation says inflation for the poorest households could top 10% by the autumn. Sunak has a Spring statement on March 23 and should be able to report that government coffers are in better shape than expected, which his critics will say gives him wiggle room to be kind.
Resolution says “Chancellor is heading into the Spring Statement with good news on the public finances but terrible news on the family finances”.
So he could afford to delay April’s rise in National Insurance set to cost the average worker £250 a year. So far, the chancellor has indicated reluctance to do that.
Food prices are also spiking. Ronald Kers, the boss of food firm 2 Sisters, said today food costs could go up by 15% this year.
Such rises will hit consumer spending, and lead to falling GDP, which ought in turn to reduce inflationary pressures in time, note economists.
