LONDON (AP) — The Bank of England is expected to announce its biggest interest rate hike in three decades on Thursday as it seeks to fend off stubbornly high inflation fueled by Russia and the US invasion of Ukraine. disastrous economic policies of former Prime Minister Liz Truss.
Economists expect the bank to raise its benchmark rate by at least three-quarters of a percentage point, to 3%, after consumer price inflation returned to a 40-year high in September. Additionally, wholesale natural gas prices, although down from their August peak, are expected to rise further this winter, pushing up energy bills and further fueling a cost of living crisis.
The interest rate decision is the first since the Truss government announced £45bn ($52bn) in unfunded tax cuts that sparked financial market turmoil, pushed up costs mortgages and forced Truss out of office after just six weeks. His successor, Rishi Sunak, has warned against spending cuts and tax increases as he seeks to undo the damage and show Britain is committed to paying its bills.
The rate hike will likely be the Bank of England’s eighth consecutive and largest since 1992. It comes after the US Federal Reserve announced a fourth straight three-quarter point jump on Wednesday as central banks around the world world are tackling inflation which is eroding living standards and slowing down. economic growth.
Britain’s central bank could choose to hike rates by up to 1 percentage point to show it’s serious about tackling inflation after being criticized for being slow to react earlier this year, says Luke Bartholomew , Senior Economist at abrdn.
“The Bank of England will try to look through the volatility caused by government policy and gas price movements, and focus on underlying inflationary pressure,” Bartholomew said in a note to investors. “However, given the impact on household spending of such large inflationary moves and the risk to inflation expectations, this adds further complication to an already very difficult policy decision for the bank.”
Central banks have struggled to contain inflation after initially believing price rises were fueled by international factors beyond their control. Their reaction intensified in recent months when it became clear that inflation was taking root in the economy, translating into higher borrowing costs and higher wage demands.
The war in Ukraine has driven up food and energy prices around the world as shipments of natural gas, grain and cooking oil have been halted. This came on top of inflation which started to pick up last year as the global economy began to recover from the COVID-19 pandemic.
Europe has been particularly hit hard by a spike in natural gas prices as Russia responded to Western sanctions and support for Ukraine by cutting shipments of fuel used to heat homes, generate electricity and the oil industry electricity and European nations competed for alternative supplies on world markets.
The UK also struggled, with wholesale gas prices quintupling in the 12 months to August. While prices have fallen more than 50% since the August peak, they are expected to rise again during the winter heating season, worsening inflation.
The British government has sought to protect consumers with a cap on energy prices. But after the turmoil caused by Truss’ economic policies, Treasury chief Jeremy Hunt limited the price cap to six months instead of two years, ending on March 31.
Meanwhile, food prices jumped 14.6% in the year to September, driven by soaring prices for staples such as meat, bread, milk and eggs , said the Office for National Statistics. This brought consumer price inflation down to 10.1%, the highest level since early 1982 and equal to the level last seen in July.
The rising cost of tea bags, milk and sugar means that even the “humble” cup of tea, which people across the country turn to when they need a break from the pressures of everyday life, is becoming more and more expensive, according to the British Retail Consortium said on Wednesday.
“While some supply chain costs are starting to come down, this is more than offset by the cost of energy, which means a tough time ahead for retailers and households,” said Helen Dickinson, director general of the consortium.
The failure of Truss’ economic plan has made matters worse, pushing the pound to a record high against the dollar, threatening the stability of some pension funds and triggering predictions that the Bank of England will raise interest rates higher than expected. This increased mortgage costs as lenders reviewed their products.
The economic turmoil is making home ownership even more out of reach for many young people, according to research released this week by Hamptons, a UK property agency.
Mortgage rates are averaging around 6.5%, down from 2% a year ago.
This means the average first-time home buyer would need to put down a down payment equal to 41% of the purchase price to keep their monthly repayments at the same level as a similar buyer who made a 10% down payment last year. , Hamptons said.
Against this backdrop, Bank of England Governor Andrew Bailey said last month that policymakers “will not hesitate” to raise interest rates to bring inflation back to the 2% target of the bank.
“As things stand, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August,” Bailey said Oct. 15 in Washington.
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