Will the Bank of England steal Christmas by raising interest rates? | Interest rate



After Rishi Sunak’s budget, it’s the Bank of England’s turn. On Thursday of this week, Threadneedle Street will end the rampant speculation, right, on whether we’re about to see the first interest rate hike since the start of Covid-19.

Financial markets are betting now is the time to take off from the current historic low of 0.1%, amid soaring inflation and an economy a hair’s breadth away from its pre-pandemic peak.

Britain’s biggest banks are in clear agreement, preparing to raise mortgage rates.

Households are warned of a triple whammy: the pressure on the cost of living due to high inflation will be aggravated by the tax hike by the Chancellor and the increase in borrowing costs by the central bank.

However, be careful when tossing your chips with City speculators betting on a hike this week. While it is clear that the only way is to increase borrowing costs, the timing is by no means guaranteed.

Charged with bringing inflation down from nearly 5% next year to its 2% target, the Bank’s Monetary Policy Committee (MPC), which sets interest rates, has many reasons to wait.

Global supply chain disruptions are the main drivers of Britain’s recent inflationary surge, but bottlenecks are expected to subside next year. In the meantime, changing interest rates will not produce more truck drivers.

Empty supermarket shelves are the result of supply chain problems, which are also driving inflation up. Photograph: Getty Images

Economic growth has weakened amid the disruptions of recent months, while consumer confidence has plummeted and coronavirus infections have remained stubbornly high. With a tough winter ahead, raising rates to relieve an already cooling economy could prove short-sighted.

Some MPC members are calling for caution, arguing that more time is needed to assess the impact of the end of the holiday in September and to see whether the inflation driven by shortages spills over into further wage increases for the future. British workers.

If we go by official budget forecasts, a spiraling inflation leading to wage increases is unlikely anytime soon.

According to the Institute for Fiscal Studies, a decade of stagnant wage growth is fast becoming two – the worst period of rising living standards in modern British history. This is not a suitable backdrop for the first rate hike since the start of the pandemic.

For these reasons, Thursday’s rate decision is more likely to be a finely balanced affair. With some MPC members preferring to wait, the vote on the nine-member tariff-setting panel will likely be split. Take-off could be postponed until December. Or later. Andrew Sentance, a member of the MPC between 2006 and 2011, thinks February would be a more suitable time.

Scrooge-type rate hikes before Christmas are rare, with only one hike in December since the mid-1970s. Such a move would fall outside the normal cycle of monetary policy reports and Bank press conferences, which explain in detail his actions. Breaking this trend could signal that the Bank has fallen behind.

Andrew Bailey, his governor, played his cards close to his chest. The city’s economists see its apparent reluctance to flout financial markets as a tacit acknowledgment that rates will now go up.

BNP Paribas economists call it Bailey’s “noise of silence”, but it’s a sticky position to find itself in, with financial markets effectively putting the governor in a corner. Thursday’s rate hike would suit the picture, but a pause to breathe could well embarrass the governor.

For the successor to “unreliable boyfriend” Mark Carney, who disappointed City’s 2014 story, this could be history repeating itself.


Leave A Reply

Your email address will not be published.