Bank of England on brink of biggest interest rate rise since 1995 – business live | Business

Introduction: Bank of England on brink of biggest rate hike since 1995

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

The Bank of England could make a little piece of history today, by raising UK borrowing costs by the highest amount since Gordon Brown gave it control of interest rates 25 years ago.

The Bank sets interest rates at noon, and many (but not all) City economists predict that its policymakers will plump for a 50 basis point rise. That would lift Bank Rate to 1.75%, up from 1.25%.

If so, it would be the first 50bp rise since 1995, 27 years ago, taking interest rates to their highest since December 2008.

Hiking borrowing costs sharply could push the UK closer to recession. However, the Bank’s Monetary Policy Committee could take the plunge in an attempt to squell inflation – now at a 40-year high of 9.4%, far far above its 2% target.

Governor Andrew Bailey set the scene last month, telling a City audience that the Bank could abandon its policy of increasing rates in quarter-point steps.

At a speech at Mansion House in London, Bailey declared:

“Let me be quite clear: there are no ifs or buts in our commitment to the 2% inflation target. That’s our job, and that’s what we will do,”

The MPC has already raised UK interest rates by 0.25 percentage points five times this year, and a Reuters poll this week found that more than 70% of 65 economists expected a half-point increase today.

Katharine Neiss, chief European economist at PGIM Fixed Income, says the BoE may use today’s meeting to put through one more final, substantive rate hike before the economy starts to soften materially.

There are already signs the UK economy is starting to cool, says Neiss, adding:

There is still a lot of uncertainty around how the recent energy price and inflation shocks will impact economic activity, as well as the cumulative impact of rate rises by the BoE since last December, as these will take some time to feed through.

There is broad agreement that the economy is set to cool further, but what remains an open question is by how much, and this is going to determine the path of policy going forward.

It’s already been a summer of hefty rate hikes, with the European Central Bank raising its benchmark rate by 50 basis points last month, and the US Federal Reserve hiking by 75 basis points in both June and July.

A winter of misery is approaching, with inflation heading into double-digits soon.

Yesterday, the Resolution Foundation thinktank predicted the UK’s annual inflation rate could hit 15% at the start of 2023, due to further sharp increases in energy prices.

That would intensify the squeeze on households, particularly poorer ones, who need more help from the government to get through the coming months.

Resolution’s Jack Leslie warned that the jump in gas prices since the Ukraine war began meane UK energy bills could hit £3,600 early in 2023.

Consumer price inflation will now peak higher and later than the Bank of England previously thought, with CPI inflation plausibly moving above 15 per cent next year (without Government measures to reduce prices).

Higher and more persistent inflation both mean that the Bank of England faces a protracted period of challenging policy making.

More importantly, low-to-middle income families are likely to face disproportionately higher living cost levels for the foreseeable future.

But, for consumer prices, any recent falls in commodity prices have been more than offset by the huge rise in European gas prices. The energy price cap is now set to hit around £3,600 in the new year – nearly 4 times the typical pre-2022 level. pic.twitter.com/4NgRFRPT9q

— Resolution Foundation (@resfoundation) August 3, 2022

That all means that the peak in inflation is set to be higher than previously thought – and last longer. Forecasting inflation based on historic time series dynamics of inflation indexes (plus the expected energy price cap) suggests that CPI inflation could plausibly hit 15%. pic.twitter.com/e45Bi6nlV8

— Resolution Foundation (@resfoundation) August 3, 2022

The Bank will release its own economic forecasts at noon, and are expected to show inflation heading higher than it expected three months ago.

The agenda

  • 8.30am BST: Eurozone construction PMI for July
  • 9am BST: UK car sales for July
  • 9.30am BST: Eurozone construction PMI for July
  • 12pm BST: Bank of England interest rate decision
  • 12.30pm BST: Bank of England interest rate decision

Key events

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Braverman on Bank of England reform:

Cannot say whether she thinks the BoE has too much or too little power, but Truss wants to review it anyway. “That’s not to take away the BoE’s independence.” But there are “degrees of independence” that are less “exclusionary”. WUT? ~AA pic.twitter.com/K2hGkaFBG2

— Best for Britain (@BestForBritain) August 4, 2022

Attorney General Suella Braverman also told Sky News that Liz Truss wants to make the Bank of England ‘more responsive’ to challenges, such as the global fight against inflation.

She’s very interested in looking at how the Bank of England operates, maintaining its independence of course, but also ensuring that it’s much better placed and more responsive in the future to economic challenges like the type we’re seeing at the moment.

Ofgem has confirmed that the energy price cap will be updated quarterly, rather than every six months, as it warned that customers face a “very challenging winter ahead”.

The energy regulator said reviewing the price cap for household bills in Great Britian every three months would allow it to “adjust much more quickly” to volatility in the market. More here:

Truss would review Bank of England’s mandate

Attorney General Suella Braverman has confirmed that Liz Truss would review whether the Bank of England’s current arrangements are “fit for purpose” if she becomes prime minister.

Braverman, an ally of Liz Truss, told Sky News:

“Interest rates should have been raised a long time ago and the Bank of England has been too slow in this regard.”

She added that the review will examine whether the Bank’s ‘entire exclusionary independence’ over interest rates was appropriate.

“Liz Truss has made clear that she wants to review the mandate that the Bank of England has, so that’s going to be looking in detail at exactly what the Bank of England does and see whether it’s actually fit for purpose in terms of its entire exclusionary independence over interest rates.”

The Bank cut rates to record lows of 0.1% in March 2020, after the Covid-19 pandemic began.

It left them there until last December, concerned that unemployment would rise when the furlough job protection scheme ended.

Liz Truss, the frontrunner to become the next UK prime minister, wants to look to change the Bank of England’s mandate to ensure it controlled inflation.

Speaking at a hustings of Conservative party members in Cardiff on Wednesday, Truss said she wanted to review the BoE’s mandate, which has a target of 2% inflation, the Financial Times reports.

She told the event:

“The best way of dealing with inflation is monetary policy and what I have said is I want to change the Bank of England’s mandate to make sure in the future it matches some of the most effective central banks in the world at controlling inflation.”

Truss added:

“The last time the mandate was looked at was in 1997 under Gordon Brown. Things are very, very different now.”

Truss has previously cited the Bank of Japan as an example of success tackling inflation.

Core inflation in Japan is running at just 2.2%, but the BoJ’s main challenge has been fighting deflation despite introducing negative interest rates and running the biggest quantitative easing (government bond-buying) program of all major central banks.

Since last December, the Bank has already increased its key interest rate, Bank Rate, from 0.1% to 1.25%, in response to the rising cost of living.

UK interest rate rises

But the Bank admits it will take time to work (monetary policy operates with a time lag) — and it certainly hasn’t cooled UK inflation yet:

UK inflation rate

Analysts at ING say a 50bp hike looks highly likely, especially after Governor Andrew Bailey specifically put a hike of this size on the table in his comments last month.

ING explain:

Admittedly, there’s a chance we simply get another 25bp move, given there’s not much in the recent economic data flow to suggest the BoE needs to move more aggressively than it did in June.

But concerns among hawkish committee members about job market tightness and a weaker pound point to a larger move this week – especially given that this is what markets are pricing.

Looking further ahead, ING have been pencilling in another 25bp hike in September, before a pause, but accept this may be a slight underestimate.

We highlighted last week that persistent worker shortages, as well as potential tax cuts depending on the result of the Conservative leadership contest, could ultimately see the Bank deliver another 25-50bp on top of what we’ve been forecasting.

UK interest rates are set by vote, by the nine members of the Bank’s monetary policy committee. Some are keener than others to raise rates sharply.

At the last meeting in June, three MPC members wanted a 50 basis-point rise, but were outvoted by the other six who favoured a smaller, quarter-point increase to 1.25%.

Those three hawks were Jonathan Haskel, Catherine Mann and Michael Saunders (whose MPC term ends this month).

Bloomberg reckons that deputy governor Dave Ramsden, chief economist Huw Pill, and governor Andrew Bailey are most likely to join the hawks, while deputy governor Jon Cunliffe and external member Silvana Tenreyro were the most dovish.

The Bloomberg Economics Spectrometer highlights a growing likelihood that the Bank of England will raise interest rates by 50 basis points to 1.75% on Thursday https://t.co/ruMhgqcwoF

— Bloomberg (@business) August 1, 2022

Introduction: Bank of England on brink of biggest rate hike since 1995

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

The Bank of England could make a little piece of history today, by raising UK borrowing costs by the highest amount since Gordon Brown gave it control of interest rates 25 years ago.

The Bank sets interest rates at noon, and many (but not all) City economists predict that its policymakers will plump for a 50 basis point rise. That would lift Bank Rate to 1.75%, up from 1.25%.

If so, it would be the first 50bp rise since 1995, 27 years ago, taking interest rates to their highest since December 2008.

Hiking borrowing costs sharply could push the UK closer to recession. However, the Bank’s Monetary Policy Committee could take the plunge in an attempt to squell inflation – now at a 40-year high of 9.4%, far far above its 2% target.

Governor Andrew Bailey set the scene last month, telling a City audience that the Bank could abandon its policy of increasing rates in quarter-point steps.

At a speech at Mansion House in London, Bailey declared:

“Let me be quite clear: there are no ifs or buts in our commitment to the 2% inflation target. That’s our job, and that’s what we will do,”

The MPC has already raised UK interest rates by 0.25 percentage points five times this year, and a Reuters poll this week found that more than 70% of 65 economists expected a half-point increase today.

Katharine Neiss, chief European economist at PGIM Fixed Income, says the BoE may use today’s meeting to put through one more final, substantive rate hike before the economy starts to soften materially.

There are already signs the UK economy is starting to cool, says Neiss, adding:

There is still a lot of uncertainty around how the recent energy price and inflation shocks will impact economic activity, as well as the cumulative impact of rate rises by the BoE since last December, as these will take some time to feed through.

There is broad agreement that the economy is set to cool further, but what remains an open question is by how much, and this is going to determine the path of policy going forward.

It’s already been a summer of hefty rate hikes, with the European Central Bank raising its benchmark rate by 50 basis points last month, and the US Federal Reserve hiking by 75 basis points in both June and July.

A winter of misery is approaching, with inflation heading into double-digits soon.

Yesterday, the Resolution Foundation thinktank predicted the UK’s annual inflation rate could hit 15% at the start of 2023, due to further sharp increases in energy prices.

That would intensify the squeeze on households, particularly poorer ones, who need more help from the government to get through the coming months.

Resolution’s Jack Leslie warned that the jump in gas prices since the Ukraine war began meane UK energy bills could hit £3,600 early in 2023.

Consumer price inflation will now peak higher and later than the Bank of England previously thought, with CPI inflation plausibly moving above 15 per cent next year (without Government measures to reduce prices).

Higher and more persistent inflation both mean that the Bank of England faces a protracted period of challenging policy making.

More importantly, low-to-middle income families are likely to face disproportionately higher living cost levels for the foreseeable future.

But, for consumer prices, any recent falls in commodity prices have been more than offset by the huge rise in European gas prices. The energy price cap is now set to hit around £3,600 in the new year – nearly 4 times the typical pre-2022 level. pic.twitter.com/4NgRFRPT9q

— Resolution Foundation (@resfoundation) August 3, 2022

That all means that the peak in inflation is set to be higher than previously thought – and last longer. Forecasting inflation based on historic time series dynamics of inflation indexes (plus the expected energy price cap) suggests that CPI inflation could plausibly hit 15%. pic.twitter.com/e45Bi6nlV8

— Resolution Foundation (@resfoundation) August 3, 2022

The Bank will release its own economic forecasts at noon, and are expected to show inflation heading higher than it expected three months ago.

The agenda

  • 8.30am BST: Eurozone construction PMI for July
  • 9am BST: UK car sales for July
  • 9.30am BST: Eurozone construction PMI for July
  • 12pm BST: Bank of England interest rate decision
  • 12.30pm BST: Bank of England interest rate decision

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