The Bank of England is expected to raise interest rates to 0.75 percent on Thursday, the third rise in a row, as it attempts to contain a significant rise in inflation caused by Russia’s invasion of Ukraine.
A rate hike on March 17 would return cost of borrowing to where they had been before COVID-19 hit the UK two years ago, but it is unlikely to be the Bank of England’s final hike.
With an increase to 0.25 percent in December, the Bank of England became the first major central bank to raise rates since the outbreak began. Along with the 0.5 percent increase in February, it began to gradually reverse its bond purchases of 895 billion pounds ($1.17 trillion).
The Federal Reserve in the United States is expected to begin raising interest rates on Wednesday, and the European Central Bank revealed this week that its bond-buying stimulus will end in the summer.
The Bank of England expected that client price inflation would rise in April for around 7.25 percent, when domestic energy fees are anticipated to rise by more than 50 percent, before the invasion of Ukraine.
Inflation is expected to exceed 8% subsequently this year, achieving its highest level since 1980s, according to economists. Natural gas, which is used to heat most British homes, is now 60 percent more expensive than it was before the February meeting.
Higher rates will not prevent inflation from rising in the short term, and the rise in energy prices will put a strain on British living standards, ultimately lowering inflation.
However, the Bank of England believes that raising rates now is necessary to avoid high inflation becoming baked into longer-term expectations, which was a costly problem the last time inflation was this high in the UK, in the early 1990s.
Investors expect the Bank of England to raise interest rates to 2 percent by the end of 2022
Some economic experts believe this is too aggressive; according to the Bank of England’s own projections, inflation would fall below its objective of 2% in 2-3 years if Bank Rate was near 1.5 percent in 2023.
However the UK economy recovered its pre-crisis shape in November, prior to the Omicron wave of coronavirus cases, the result has not yet caught up with lost development, as it has in the US.
Several economic experts, such as Paul Dales of Capital Economics, believe the UK’s tight job openings hit a new high in January will force the BoE to increase interest rates to as high as 2% next year.
An internal survey released last month worried policymakers by revealing that companies intend to raise wages by 5% this year.
Four of the nine representatives of the Bank of England’s Monetary Policy Committee elected in February for a half-point rate increase, to 0.75 percent instead of 0.5 percent, the largest increase the central bank has made since acquiring operational independence in 1997.
Despite the fact that rising energy prices are expected to slow growth this year, Dales believes that most MPC members will continue to believe that further tightening is necessary.
According to a survey released by the Bank of England on Friday, public inflation expectations for the next 12 months have risen to their highest level since 2008.
Inflationary pressures are at their highest level in at least a decade, according to financial markets.