Bank of England to hike interest rates to 5.5 per cent to tame scorching inflation
The Bank of England will have to hike interest rates to a peak of 5.5 per cent to tame steaming inflation, threatening to push the UK economy back to the edge of recession, markets bet today after fresh numbers showed price pressures are withstanding rate rises.
Upward moves in financial markets’ expectations for peak UK interest rates were triggered by numbers from the Office for National Statistics (ONS) this morning revealing inflation is still smashing experts’ forecasts.
Headline inflation – measured by the consumer price index – slipped out of the double digits for the first time since last August to 8.7 per cent in April, its lowest level in more than a year and down from 10.1 per cent.
That figure topped City analysts’ expectations of a drop to 8.2 per cent and the Bank of England’s prediction it would fall to 8.4 per cent.
However, markets took fright at the underlying inflation numbers within ONS’s research. The yield on the 2-year gilt jumped 25 basis points and the FTSE 100 slumped 1.5 per cent. The pound rose slightly against the US dollar. Gilt prices and yields move inversely.
Bank Governor Andrew Bailey today claimed a “substantial amount” of the price surge is being driven by “imported inflation”.
Core inflation – which strips out volatile food and energy price movements – leapt to 6.8 per cent, the highest level since March 1993. That was also a shock jump, with analysts forecasting the rate to hold steady at 6.2 per cent.
Interest rates have risen twelve times in a row already
That rise signals the initial inflation burst that was driven by an external energy price shock caused by Russia’s full-scale invasion of Ukraine is pushing up prices for goods and services produced domestically.
Bailey and the rest of the monetary policy committee have said raising interest rates has little impact on inflation shocks driven by foreign dynamics, like higher prices for imported gas.
Instead, they are more focused on reining in domestic workers’ pay demands and businesses’ price setting, known as “second-round” inflation effects.
Bailey said the Bank’s forthcoming interest rate decisions will be “driven by how the evidence shapes up”.
Economists judged the upside inflation surprise as nailing on a thirteenth straight rate rise on 22 June.
Analysts at investment bank Nomura said they no “longer feel the data allow the Bank of England to stop after just one more hike,” adding they “see a terminal rate of 5.25 per cent being reached by September”.
Experts at consultancy Capital Economics agreed with that assessment, warning such a move by Bailey and co would make “a recession at some point more likely”.
Monetary policy committee officials – the nine-member group tasked with setting UK interest rates – have also said taming services inflation is crucial to preventing baking high prices into the economy.
That rate rose to 6.9 per cent in April from 6.2 per cent, again, beating the Bank’s forecast of a smaller rise to 6.7 per cent.
The sum total of these much hotter than feared inflationary pressures is that the Bank will have to lift borrowing costs to a peak of 5.5 per cent, which would be the highest level since December 2007, markets reckon.