Bank of England set to announce another interest rate rise as inflation skyrockets

Interest rates 'not getting fed through' to savings says expert

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Economists have forecast the bank to hike interest rates by 25 basis points to 0.75 percent despite the ongoing war in Ukraine shadowing the worldwide fiscal outlook. This latest intervention by the Bank of England would be the third consecutive rise in interest rates since the beginning of the coronavirus pandemic. Furthemore, another increase of 0.25 percent is expected to take place in May 2022 which will see rates hit one percent.

The Bank of England’s Monetary Policy Committee (MPC) originally hiked rates in December from unprecedented lows of 0.1 percent to 0.5 percent.

In the first back-to-back interest rate rise since 2004, the bank doubled rates from 0.25 percent to 0.5 percent in February.

As interest rates continue to go up, UK inflation has hit a 30-year high of 5.5 percent in the year to January.

This increase is the highest consumer price index (CPI) 12-month inflation rate since March 1992 and was higher than the Bank of England’s initial forecast of two percent, according to the Office for National Statistics (ONS).

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Furthermore, data released by the ONS earlier this week revealed that workers in the UK are experiencing a dramatic fall in wages.

Real regular pay for the average worker dropped by one percent in the three months to January, which represents the largest fall since 2004.

Surprisingly, this blow for workers across the country comes as payroll numbers hit 29.7 million in February and vacancies soared to 1.3 million over the same period.

Similar decisions to the Bank of England have also taken place across the pond as the United States’ Federal Reserve confirmed plans to hike interest rates yesterday (March 16).

Thomas Pugh, economist at RSM UK, outlined his predictions for the Bank of England’s decision.

Mr Pugh explained: “We’re expecting a unanimous vote to raise interest rates from 0.50 percent to 0.75 percent at today’s MPC meeting.

“The committee has previously made it clear that it is more concerned about the risk from inflation than the danger of weaker economic growth and the recent jump in commodity prices has only heightened that risk.

“The committee has previously made it clear that it is more concerned about the risk from inflation than the danger of weaker economic growth and the recent jump in commodity prices has only heightened that risk.

“Increases in the price of energy products and a swathe of commodities, from wheat to aluminium, will send inflation sharply higher in the next few months and keep it high for the rest of the year.”

Referring to the energy price cap and ongoing Ukraine conflict, the economist added: “Rather than falling by about five percent in October as we expected it to, Ofgem’s price cap may rise again by another 30 percent (or more), raising the chance of a second inflation peak in October.

“All this means inflation will probably be above five percent at the end of 2022, and it may not be until the end of 2023 that inflation is back at the two percent target.

“However, given how uncertain the economic outlook is at the minute we suspect the MPC will want to conserve as much flexibility as possible.

“This could mean that they drop their guidance that a modest tightening of policy is likely in coming months. Our base case is still that there is another rate rise in May, that would take rates to one percent but the crisis in Ukraine could easily mean this is delayed.”

RBC Markets added: “The impact of the Russia-Ukraine war means that inflationary risks are very firmly tilted to the upside, and higher inflation is likely to persist for longer than previously thought with the hit to real incomes from that weighing on demand.

“At some point, the MPC will be forced to consider the trade-off between responding to higher supply-side-driven inflation and dealing with slower growth.”

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