Waiting for lightning from the Bank of England. After delaying its decision until after a period of national mourning for the Queen’s death, Threadneedle Street could this week begin the biggest increase in borrowing costs for at least 25 years.
Announcing its plans on Friday, a day ahead of Quasi Quarteng’s mini-budget, the central bank is widely expected to tackle rising borrowing costs, despite storm clouds gathering for the British economy. Will use a fast and tremendous rate hike to show its commitment.
City economists believe a 0.5 percentage point increase from the current level of 1.75% would be the minimum for the seventh consecutive rate hike – the most aggressive tightening cycle since at least 1997 when Gordon Brown first served as chancellor. Provides freedom to the bank to determine the borrowing cost.
However, a higher 0.75-point increase could be deployed. Threadneedle Street would not want to sink in the wake of the US Federal Reserve, with the US central bank raising rates sharply on Wednesday after last week’s data showed a very sticky picture for inflation in the world’s largest economy.
On this side of the pond, inflation may ease from 10.1% in July in August, but remains close to its highest level since 1982 of 9.9% – amid rising prices of food and other basic essentials – at the bank’s 2%. About five times the target rate. ,
Official data shows unemployment has fallen to its lowest point since 1974, while job vacancies remain high, giving the bank some sign of strength in the economy despite rising recession risks. Taking into account annual wage growth before inflation – a key metric watched by the bank – rose, even workers continue to feel the pinch as inflation accelerates at a faster rate.
Financial markets are valuing a nearly 90% chance that the cost of borrowing will increase by 0.75 points, an unprecedented increase in the bank’s 25 years of independence.
“The energy shocks we are seeing are not really comparable to anything we have seen, so it makes sense for monetary policy to act in unprecedented ways,” said Modupe Edgbembo, an economist at AXA Investment Managers. ” “Given market pricing for a 75-basis-point increase, not doing so could exacerbate weakness in sterling.”
The pound plunged to its lowest depth in 40 years against the dollar over the summer, reflecting investor unease over the UK’s deteriorating economic prospects. Like other large European currencies, sterling is under pressure from a stronger dollar, as well as concerns over skyrocketing inflation amid Russia’s war in Ukraine.
However, in the ugly competition of the money-market, the UK is particularly exposed. Investors believe Liz Truss’s raising public borrowing for her £150bn energy aid package is not helping matters. Nor are threats made in the conservative leadership campaign to curtail the independence of the bank.
The details of the truss support measures are expected in the mini budget the next day. Most economists expect this to help reduce the peak of inflation and reduce the severity of the impending recession by putting more money in the pockets of households.
For the bank, however, this could mean further raising interest rates to reduce the spread of inflation affecting the consumer economy. Financial markets expect the base rate to reach above 4.5 per cent by next summer.
All this creates a major confrontation between the government and the bank’s governor, Andrew Bailey, who has been in the crosshairs of the truce for some time, with a review of the central bank’s mandate expected this autumn.
Bailey is unlikely to be fired, given the panic in financial markets about the truss interfering with the bank’s governance at a time of rising public borrowing. But with high interest rates braking the brakes, just as the truss is pushing to prop up the economy at all costs, a bigger battle is guaranteed at the Bank of England.