UK: Bank of England considers unprecedented rate hike in more than 30 years – 03/11/2022 at 09:44

“The real problem will be forecasting growth and inflation despite the uncertainty about the new prime minister’s fiscal strategy,” analysts said.


(AFP / ISABEL INFANTES)

To combat galloping inflation, the Bank of England should raise interest rates by 0.75 percentage points on Thursday (November 2), a majority of analysts predict, although the uncertainty hanging over the UK economy prompts some to be cautious. Such an increase would be the first since October 1989.

The Monetary Policy Committee (MPC) shares its interest rate decision at 12:00 GMT (13:00 Paris time) and a sharp increase is expected, then

inflation again exceeded 10% in October.

A 0.75 basis point increase would bring the key rate to 3%, a high since 2008.

It would then adopt the same rapid pace of rate hikes as the European Central Bank (ECB) last week and the US Federal Reserve (Fed) on Wednesday night. But once again,

Bank of England (BoE) sails “blind”

comment NatWest analysts, with reversals in UK government policy fueling the smog clouding the outlook for the country’s economy.

Already at the end of September, the MPC had shared its decision on a 0.50 point increase on the eve of budget announcements from Liz Truss’s new government. The bank had no idea of ​​the catastrophic effect of these ultra-expensive and poorly quantified announcements, which caused the sovereign debt rate to rise to the point that it forced the BoE to intervene by buying long-term securities to prevent a bad one. bikes across the UK market.

Budget uncertainty

Barely arrived in Downing Street for the last BoE meeting, Liz Truss unknowingly was already halfway through the term, giving way to Rishi Sunak, who in turn pushed back the presentation of his own budget to mid-November.

“The real difficulty for the MPC will be forecasting growth and inflation.

despite uncertainty about the new Prime Minister’s fiscal strategy”, NatWest analysts explain. In August, the BoE predicted a slowdown in activity every quarter between the end of 2022 and the end of 2023 and a peak in inflation of more than 13% in October , figure revised to less than 11% since.

“Mr Sunak’s government will try to cut spending and raise taxes to bring down debt levels,” predicts Dean Turner, an analyst at UBS, who recalls that “this counts for the BoE”.

The government’s fiscal restraint has a deflationary effect

which could pressure the BoE not to act too quickly to avoid further weighing on the already slowing UK economy.

Persistent inflation

Some members of the MPC could therefore be tempted by an increase of just 0.50 points. Conversely, persistent inflation may push some of its members to favor an increase of one percentage point, estimates Ruth Gregory from Capital Economics.

Since the last official BoE forecast in August, “the labor market has remained tighter than the bank expected. And wage growth was higher than its forecast,”

signs that inflation is taking hold in the country

she explains.

The bank also started on Tuesday its program to sell volumes of government bonds accumulated, notably through an asset purchase program (quantitative easing or QE), during the first months of the Covid-19 pandemic.

She sold £750 million of short-term bonds

, she said. In mid-October, it said it held 837.88 billion pounds (972.56 billion euros) of government bonds and 18.10 billion pounds (21.01 billion euros) of corporate bonds.

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