Bank of England and Rishi Sunak fail to win over investors on inflation fight

Investors are sweating over Britain’s inflation problem running out of control and the Bank of England being unable to solve it any time soon, exclusive research for City A.M. has revealed.

More than a year of raging prices has eroded confidence in policymakers’ ability to ease the cost of living crisis.

Some 56 per cent of UK retail investors think scorching inflation is now entrenched in the economy, according to analysis by broker HYCM.

The survey indicates traders are not yet convinced that Bank Governor Andrew Bailey and the rest of the monetary policy committee’s (MPC) actions to bring down inflation will work.

Last week, they raised borrowing costs 50 basis points to five per cent, a move that blindsided City money managers who thought the MPC would opt for a smaller 25 basis point increase.

It was the 13th straight increase to the UK’s official interest rate and sent it to its steepest level since 2008.

Despite the Bank’s efforts, inflation has remained stubbornly high in the UK and is comfortably the highest in the rich world.

The rate of price increases held steady in May at 8.7 per cent, while core inflation – which strips out volatile food and energy prices – climbed to 7.1 per cent. Services prices are also accelerating at more than seven per cent.

Yael Selfin, chief economist at KPMG UK, told City A.M. the Bank will need to keep lifting rates until “there are more concrete signs of moderation in domestic price setting behaviour”.

“The Bank of England’s larger-than-expected rate hike shows that it’s losing confidence and patience on inflation,” James Smith, developed markets economist at ING, told City A.M.

Financial markets think Bailey and co are on course to hoist borrowing to costs to a peak of more than six per cent.

HYCM’s research found market participants are worried about the value of their assets tumbling in such a scenario, with 43 per cent of the 914 retail investors surveyed by the firm calling for the Bank to stop raising rates now.

“Investors are rightfully concerned about the impact of inflation on their assets and the wider economy. Confidence is evidently low, with most not believing inflation targets will be met,” Giles Coghlan, chief market analyst, consulting at HYCM, said.

Just under a third of the surveyed group reckon Prime Minister Rishi Sunak will reach his goal of halving inflation to around five per cent by the end of the year. 

The Bank of England is responsible for keeping inflation stable at two per cent.

The Bank of England declined to comment.

A Treasury spokesperson said: “We fully support the Bank of England as they take difficult decisions to return inflation to the two per cent target.   

“The IMF say our response to inflation has been decisive and a recent PwC survey found that the UK now ranks third globally as a priority investment destination for CEOs.”