LONDON: The Bank of England faces another big interest rate hike later Thursday to fight soaring inflation, even if it worsens a cost-of-living crisis that the UK government is seeking to contain.
The British central bank will announce its latest decision at 1100 GMT after a meeting that had been postponed from last week following the death of Queen Elizabeth II.
Most economists forecast policymakers to lift the BoE’s key rate by 0.50 percentage points to 2.25 percent, repeating its August increase that had been the biggest rise since 1995.
Some commentators even predict the BoE could mirror the European Central Bank and the US Federal Reserve and spring a jumbo hike of 0.75 percentage points – which would be the BoE’s largest in three decades.
The world’s major central banks are rushing to ramp up borrowing costs to dampen red-hot global consumer prices, which have galloped to their highest levels in decades on rampant energy and food prices in the wake of Russia’s war on Ukraine.
Rising rates have fanned recession fears because they push up loan repayments for consumers and companies alike, thereby exacerbating the UK’s cost-of-living crisis.
The Fed on Wednesday unveiled a 0.75-percentage-point increase, its third straight jumbo hike, one day after Sweden’s Riksbank shocked markets with a jump of a full percentage point.
“We think (the) Bank of England decision is a finely balanced one, but find the arguments for a 75-basis-point move more compelling than those for a 50-basis-point increase,” said BNP Paribas economist Paul Hollingsworth.
“The key development since the last meeting is the unveiling of new Prime Minister Liz Truss’s fiscal package, which is likely to lower inflation considerably in the short term, but boost it in the medium term.”
Truss on Wednesday launched a six-month plan, starting in October, to pay about half of energy bills for businesses, charities, hospitals and schools, as she sought to soften the economic blow of sky-high prices.
The premier had already announced plans for a two-year energy price freeze for cash-strapped households.
Finance minister Kwasi Kwarteng will unveil Friday a mini-budget of tax cuts designed to boost economic activity, and will also outline the vast cost of the energy assistance.
Yet the package threatens to ultimately push inflation higher as a result of strengthening demand, according to US bank Citi.
“While the capping of energy prices is disinflationary in the first instance, we continue to see many of these measures as boosting demand and increasing the risk of more embedded inflation,” wrote Citi analysts in a research note.
Commentators also warn the measures will ravage public finances that are already reeling from huge spending during the deadly Covid pandemic.
Barclays bank analysts estimate that the government’s total cost-of-living expenditure could reach a colossal £235 billion ($267 billion).
Sky-high inflation is meanwhile crippling economic activity and threatens to plunge Britain into recession later this year, the BoE itself had forecast in August.
UK inflation eased in August to 9.9 percent after striking a 40-year peak of 10.1 percent in July but remains elevated, with the BoE predicting 13 percent later this year.
The current rate is almost five times the BoE’s target of 2.0 percent.
The bank earlier this month defended itself against accusations of being too slow to tackle sky-high inflation, after Truss proposed to review its operational independence.
Governor Andrew Bailey has expressed confidence in bringing down inflation, arguing that Britain was “heavily exposed” to surging gas prices after key supplier Russia invaded neighbouring Ukraine.