Bank of England Governor Andrew Bailey: under pressure
(Picture: PA Wire)THE CHANCES of the Bank of England shoving up borrowing costs at the fastest pace since 1995 grew today when inflation again topped City expectations.
Economists say the Bank could increase rates by 0.5 percentage points at its next rate-setting meeting in March – a quarter point rise is far more usual.
Such a move would increase talk that the Bank is behind the curve on inflation and has been forced to play “catch-up” as prices soar, leaving the economy “in a chokehold” as one commentator put it this morning.
January inflation was 5.5%, up from 5.4% in December as transport, food and fuel costs all jumped. It was last higher in March 1992, when it stood at 7.1%.
The Bank’s monetary policy committee (MPC) put rates up from 0.25% to 0.5% two weeks ago in response to soaring inflation.
But four of the nine members voted then for a 0.5 percentage point rise – something the Bank has not done since gaining independence in 1997. A 50-basis point (bps) rise last happened in February 1995.
Paul Dales at Capital Economics said: “It’s certainly possible and I wouldn’t rule it out. Four out of five MPC members have shown they are willing to do it. It would only take one more to make it a reality. What’s more, you are more likely to get 50bps moves at the start of the tightening cycle when the MPC has more confidence that raising interest rates from such a low level won’t damage the economy.”
Dales thinks inflation will hit 7.9% in April.
In America, a 50-basis point rise seems nearly certain at the US Federal Reserves next meeting.
Until lately, the Bank has been insisting that inflationary pressures are transitory and a function of global factors beyond its control.
Ed Monk at Fidelity International, says: “The pace of price rises has put the Bank of England on a much more hawkish footing and a third month in a row of interest rates rises now looks likely in March. That will, of course, squeeze borrowers even more and will add headwinds for the UK economy which has only recently managed to regain the ground lost to the pandemic.”
Hinesh Patel at Quilter Investors said: “While we face inflationary pressures not seen for decades, worse is yet to come…the Bank has so-far underestimated the extent of inflation in previous forecasts.”
The inflation figure will increase pressure on the government to do more to address the ongoing cost of living crisis. But the government faces economic headaches of its own: interest rate rises add billions to the cost of servicing the national debt. The IFS says that government spending on debt interest this year will be £69 billion -- £11 billion higher than forecast in the October 2021 Budget.
Rachel Winter at Killik & Co said: “Inflation has the economy in a chokehold, with prices skyrocketing and consumers feeling significant pressure on their household budgets.”
