The Bank of England, the first among major central banks to tighten monetary policy after the pandemic, looks all but certain to reach another milestone on Thursday by taking interest rates back to their pre-Covid level.
Policy makers led by Governor Andrew Bailey are expected to increase their benchmark a quarter point to 0.75%, responding to a worsening inflation outlook that may force the bank to upgrade its forecast for price gains to peak at 7.25% this year.
The war in Ukraine provided another upward jolt to energy prices, which already were fanning a broader increase in prices across the economy. Some economists think a minority of the BOE’s nine-member policy panel will continue their push for an unprecedented 50-basis-point increase.
A hike of any kind would mark the third straight increase in rates, a pace unseen since the early days of the BOE’s independence in 1997.
The bank is acting with such urgency because inflation is already at a three-decade high and set to surge further this year with soaring food and energy prices. Bloomberg Economics says the rate could hit 10% in October, five times the BOE’s 2% target.
With markets expecting policy makers to increase rates to 2% by the end of the year, including an unprecedented 50 basis point move in June, investors will scour the minutes for any signs of a push back against, or endorsement of, that path.
That may come through comments on the implications of the war in Ukraine, the global economy, or through a focus on how the U.K.’s cost of living crisis may sap demand and boost unemployment later this year.
The U.S. Federal Reserve raised interest rates for the first time since 2018 and signaled hikes at all six remaining meetings this year, joining the global effort to rein in inflation.
Investors are betting rates in the U.K. hit 1% in May — the level at which officials say they will begin actively selling some of of bonds built up under quantitative easing.
Minutes from the meeting may contain some signals on how the BOE expects to handle that divestment. The bank has already started the process of balance sheet reduction by halting reinvests of proceeds from assets that mature, bringing their holdings down from a peak of 875 billion pounds ($1.1 trillion)
Thursday’s release is the first of two big economic events in the U.K. this month, with Chancellor of the Exchequer Rishi Sunak due to unveil his Spring Statement next week.
The government is under increasing pressure to help ease the impact of a cost of living crisis on firms and households. That raises the chance of more fiscal giveaways that may need to be offset in the coming months by monetary policy.
Source: Bloomberg