EXPLAINER-Why is the Bank of England talking about raising rates?

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LONDON, Oct 11 (Businesshala) – Under pressure to double its inflation target of 2%, the Bank of England is preparing to become the first of the world’s major central banks to raise interest rates since the coronavirus pandemic . .

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Governor Andrew Bailey said in an interview published on Friday that inflation that is running above the target should be managed to prevent it from becoming permanently embedded.

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Michael Saunders, another Monetary Policy Committee member, said it was “appropriate” that markets start raising rates much sooner than previously thought.

Here are some questions about the outlook for interest rates in the world’s fifth largest economy.

When will the Bank of England raise rates?

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Investors are betting the BoE could raise its benchmark bank rate from a record low of 0.1%, possibly after its November 4 meeting, ahead of its US and euro zone peers and in the footsteps of central banks in Norway and New Zealand. But walking.

Financial markets are seeing at least two more hikes in 2022.

But some economists, concerned with the loss of momentum in the UK economy as it runs into post-lockdown shortages of supplies and staff, think the BoE will be forced to tighten policy only very slowly.

Why is there talk of higher interest rates?

While the UK shares its supply chain problems, rising energy prices and labor shortages with many countries around the world, investors have chosen it as a country particularly prone to inflation and high policy rates, including Brexit is raising the odds.

In recent weeks, Britain’s limited stocks of natural gas left it heavily exposed to wholesale prices, while a shortage of truck drivers left fuel pumps across the country dry.

The BoE said last month that consumer price inflation had exceeded 4% at the end of the year and that fuel prices and household energy costs have risen further since then.

BoE’s new chief economist Huw Pill has said he is concerned inflation will prove to be less temporary than the central bank expected.

Will higher rates stop the immediate rise of inflation?

No, Governor Bailey has said that the BoE cannot do anything about the supply chain bottlenecks that have driven up inflation. Similarly, energy prices are beyond the control of the BoE.

But some BoE officials appear concerned that individuals and businesses may lose confidence in their ability to control inflation if they do not act soon.

The public is increasingly expecting a more rapid increase in prices and Prime Minister Boris Johnson has promised he will provide an economy with higher wages. But a survey by Bank of America last week showed no hope of higher wages, suggesting far less risk of a damaging, 1970s-style wage-price spiral.

What are the arguments against higher rates?

Some economists believe that the BoE should wait to ensure that higher rates will not further slow the economic recovery.

The government ended its employment support program while an estimated 1 million people were still on it and the household budget is set to be squeezed next year.

With higher energy bills, taxes on workers for health and social care are set to rise, while state benefits have been cut by the largest amount on record as the government ends another of its pandemic support measures .

There have also been indications that households are now saving overall again rather than spending.

History is replete with examples of economic recovery from premature attempts to normalize policy, such as when the European Central Bank raised rates in 2011 after the financial crisis.

How much will interest rates rise?

The BoE is clear that rates will remain at historically low levels, even if they rise in the near future.

Still, investors and economists are divided about the potential extent of the hike.

Interest rate futures show an almost 90% probability of an increase of 15 basis points by the end of the year, and a 25 bp increase in the full price by the middle of the following year.

Some economists believe that the MPC will move too slowly.

Samuel Tombs said, “We now think the MPC will raise the bank rate to 0.25% in the second quarter of next year, but that’s all they have to do next year and wait another 12 months before raising the bank rate again.” can do.” Pantheon Macroeconomics said.

Former BoE policymaker Andrew Sentens said a single rate hike in the near term may not be enough to catch up with a rise in inflation that could go up to 6%.

“They need to send a signal that they are ready to do something about it and that some gradual increase in interest rates will signal that,” he told BBC radio.

Reporting by Andy Bruce; Editing by William Schomberg and Toby Chopra

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