The Bank of England is poised to raise the cost of borrowing for households and businesses at today’s interest rate meeting amid mounting fears the UK economy is on the verge of entering a long recession.
Financial markets are expecting a 0.5 percentage point hike in the central bank’s interest rate to 3.5% as the monetary policy committee tries to fight inflation.
The consumer price index (CPI) fell to 10.7% last month from 11.1% in October, according to data released on Wednesday, mainly due to weaker gains in gasoline, clothing and food, but remains well above the BoE’s 2% target .
Jeremy Hunt has indicated he will welcome a tough stance on interest rates from Threadneedle Street officials after saying bringing inflation down is his main task.
The Chancellor said on Wednesday that inflation is “enemy #1 that makes everyone poorer” and that “reducing inflation so people’s wages keep rising is my top priority”.
However, anti-poverty activists, unions and opposition MPs are likely to blame the Conservative government for a triple whammy of rising interest rates, high inflation and a shrinking economy that has triggered the biggest drop in living standards on record.
Ahead of today’s decision, Bank of England Governor Andrew Bailey has kept financial markets from forecasting another sustained series of rate hikes.
Bailey and Chief Economist Huw Pill have stressed that the Bank of England’s prime interest rate would come in below the 5% forecast by markets last month. Since making their comments, most forecasters are estimating that the top will be between 4% and 4.5%.
Pill said there was a risk that a “self-sustaining” inflationary cycle could set in, with companies continuing to hike prices to allow for higher wage deals for their workers long after the pressure from rising energy costs eases.
But a study of US inflation by Paul Donovan, chief economist at UBS Wealth Management, showed that a large part of price inflation comes from companies trying to maintain their profit margins.
Donovan has urged Federal Reserve Chair Jerome Powell to make it clear that consumers are paying a price for inflated profits and that companies are more to blame than workers for worsening the cost-of-living crisis.
Danny Blanchflower, a former BoE rate setter and economics professor at Ivy League Dartmouth College, has urged Bailey to show restraint or risk plunging the UK into a deeper recession.
Earlier this month, MPC member Swati Dhingra said she was concerned the impact of eight rate hikes this year from a 0.25% floor was yet to filter through to the economy.
In an interview with the Observer, she said: “You’re looking at a much deeper and longer recession with much higher interest rates. That’s what I think we should all be concerned about…if the tightening continues at this rate, will we end up prolonging and deepening the recession?”
Dhingra voted for a 0.5% rate hike at the MPC’s last meeting in November, when the majority of the nine-member committee voted for a 0.75% hike.
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Business surveys have shown that most bosses expect rate hikes to end by the middle of next year. A third of chiefs said in a poll that the latest rate hikes by the Fed, European Central Bank (ECB) and BoE would be their last.
The Fed on Wednesday hiked its deposit rate by half a percentage point to a new target range of 4.25% to 4.5%, while the ECB is targeting a similar hike, albeit only from 1.5% to 2%.
Investors expect both to continue increasing the cost of borrowing over the next year, albeit at a slower pace.
Samuel Tombs, chief economist at consultancy Pantheon Macroeconomics, said the monthly increase in UK core CPI, which excludes volatile items such as fuel and food, was the smallest in 11 months in November.
“It’s no coincidence,” he said. “Recent declines in shipping costs and commodity prices point to a sharp decline in commodity inflation.”
He said the cost of services, which are more dependent on wages, would fall quickly over the next year as wage increases slow.
Gurpreet Gill, macro strategist at Goldman Sachs Asset Management, said the lack of momentum in the economy “justifies a slower pace of tightening.”
But she expects “structural supply issues” due to an aging population, low net migration, higher rates of early retirement and a rise in long-term illnesses to keep wage growth high post-pandemic.
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