The Bank of England is expected to raise interest rates back to its pre-pandemic levels today as it tries to dampen the UK’s inflationary surge.
The City widely anticipates the BoE will hike borrowing costs for the third meeting in a row, up to 0.75% at noon today, the highest since March 2020, despite the economic uncertainty created by Russia’s invasion of Ukraine.
With inflation hitting 5.5% in January, and likely to rise over 7% in April, the UK central bank is keen to inflation expectations in check by tightening policy.
It is fretting that a wage-price spiral could develop as squeezed families seek help in the face of the worst cost-of-living squeeze in decades — there was understandable anger last month when BoE governor Andrew Bailey suggested workers shouldn’t ask for a big pay rise.
The surge in oil and commodity prices following the Ukraine war has added to the inflationary pressure, and also darkened the UK’s economic outlook. It may not be a comfortable decision for the Bank, even though a hike looks likely.
As RBC Capital Markets explains:
The impact of the Russia-Ukraine war means that inflationary risks are very firmly tilted to the upside, and higher inflation is likely to persist for longer than previously thought with the hit to real incomes from that weighing on demand.
At some point, the MPC will be forced to consider the trade-off between responding to higher supply-side-driven inflation and dealing with slower growth.
Last night the Federal Reserve raised US interest rates for the first time since cutting them to record lows in 2020.
The Fed also signalled it was determined to get a grip on rising prices across the Atlantic, where US consumer prices have soared by 7.9% in the last year.
Fed officials now expect up to six more hikes before the end of this year, with Fed chair Jerome Powell telling reporters:
I’m old enough to remember what very high inflation was like,” he said. “We’re strongly committed as a committee to not allowing this higher inflation to become entrenched.”
A rapid hike in borrowing costs could slow the US economy, further hampering a global economy weakened by surging energy costs, the Ukraine war and the pandemic.
But Wall Street closed higher, after Powell said the US economy was “very strong” and could handle higher interest rates. The S&P 500 jumped over 2%.
Jim Reid of Deutsche Bank says:
Although I think the risks of a US recession by late 2023 / early 2024 are increasingly elevated I’m not convinced that the risks are particularly high in 2022.
The start of the hiking cycle isn’t historically the problem point for the economy or for that matter equities.
Also coming up today
Investors are watching to see if Russia managed to pay a $117m debt repayment on Wednesday. If it failed, the clock will start ticking on 30-day grace period towards its first default since the late 1990s.
Russia’s finance minister Anton Siluanov said yesterday that Moscow tried to make the interest payments on two dollar-denominated government bonds, and that it was up to the United States whether that payment order was accepted, given the sanctions on Russia’s economy.
If the dollar payment couldn’t go through, Russia could try paying in roubles – which rating agencies say would be a default….
European stock markets are set to rise, adding to yesterday’s gains as shares rebound from their slump earlier this month.
- 9.30am GMT: ECB president Christine Lagarde speaks at ‘The ECB and Its Watchers XXII’ press conference
- 10am GMT: Eurozone inflation for February (final reading)
- Noon: Bank of England interest rate decision
- 12.30pm GMT: US weekly jobless figures