Biggest interest rate rise in 30 years set to come – what does it mean for us?
- The Bank of England is expected to hike interest rates to a 33-year high this week
- The market is pricing in a rise of 0.75% to 3%
- The central bank is tightening monetary policy to try to tame inflation
- With the Chancellor’s fiscal statement delayed, the Bank will not know the government’s plans for public finances as it makes the rates decision
- There are concerns that spending cuts and tax hikes could lead to a recession worse than previously forecast
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown: “Bank of England policymakers may not be equipped with an aide memoire of a fiscal statement to work out how much corrector pen it needs to try and erase inflation, but they have a pretty clear timetable laid out about the course the economy is set to take.
The price spiral is a tough, particularly with labour shortages fuelling wage growth and volatile energy prices to navigate. However, they no longer have to deal with the threat of a mass tax cut fuelled burst of stimulus. Instead, we have a new chancellor flagging that spending will reined in, just at the moment consumer confidence is plummeting and the housing market is going into shock. Now that risks of a deeper recession have grown, the Bank of England is not forecast to mega size a rate hike this time round, but to opt for a still hefty 0.75 of a percentage point rise, taking the base rate to 3%.
Inflation may well now peak above 11% with scorching food prices in particular pushing up expectations. So, the Bank is still set to signal a further tightening of monetary policy, with financial markets now expecting that interest rates will reach around 5% next year before declining, as the impact of the recession, lower commodity prices and an easing off of supply chain snarl ups feed through.
Like the ECB last week, the Bank wants to wave red flags now to throw cold water on expectations that there will be hotter prices to come and drown out demands for higher wages, which could lead to a more embedded price spiral. Dampening down demand now by raising rates and making borrowing more expensive is set to cause further financial pain for companies and consumers, but central banks clearly think it is the price to pay to reduce the risk of a prolonged period of stagflation.’’
