LONDON, June 16 (Reuters) – The Bank of England looks set to override its worries about a sharp slowdown in the British economy and raise interest rates again on Thursday as it tries to tackle an inflation rate on course for double digits.
After the U.S. Federal Reserve upped borrowing costs by the most since 1994 with a 75 basis-point rate hike on Wednesday, the big question for investors awaiting the BoE’s June policy announcement at 1100 GMT is the size of the increase.
The BoE has already raised borrowing costs four times since December when it became the first of the world’s major central banks to increase rates after the coronavirus pandemic.
Its economy is already showing signs of a slowdown and will be the weakest among the world’s big, rich countries next year, according to forecasts by the International Monetary Fund and the Organisation for Economic Co-operation and Development.
But inflation, which hit a 40-year high of 9% in April, is set to surpass 10% later this year, more than five times the BoE’s 2% target, according to the central bank’s latest forecasts.
“Britain is stuck in the worst of both worlds and that’s what makes policymaking so difficult,” Luke Bartholomew, a senior economist with investment firm abrdn, said.
Part of the British inflation problem is the country’s mechanism for regulating domestic power prices which means the rise in prices is likely to last longer than elsewhere.
Then there is the unfinished business of Brexit. Britain and the European Union are again at logger-heads which could lead to bigger trade barriers with the bloc and higher prices.
The BoE is likely to signal again on Thursday that its series of rate hikes has further to run, although last month it suggested investors were going too far by pricing in Bank Rate hitting 2.5% by the middle of next year.
The climb is partly due to expectations of more cost-of-living help by the government after finance minister Rishi Sunak announced fresh support in May and with Prime Minister Boris Johnson seeking ways to shore up his flagging popularity.
“I think we are getting very close to the inflection point where the central bank will probably have to stop hiking,” he said. “The Bank of England might do one or two more (rate hikes), but I think we will be in recession later this year in the UK.”
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