BoE expected to hike interest rates to pre-Covid level

Forecasters are predicting a Monetary Policy Committee (MPC)-supported quarter-point increase from 0.5 to 0.75%, according to a Reuters poll of economists. This would be the highest level since January 2020.

But there is trepidation this might dampen financial markets’ expectations that borrowing costs will continue to climb steadily over the next year.

Soaring energy prices following Russia’s invasion of Ukraine consolidates the MPC’s case for hiking interest rates due to soaring inflation, economists said. It would be the third time since December 2020 that interest rates have risen.

Nevertheless, inflation is likely to continue to skyrocket in the short term and maintain a high level for a longer period – KPMG economists forecast a double-digit peak. Goldman Sachs economists estimate it to hit 9.5 percent in October, to coincide with the rise of the energy price cap.

Consumer price inflation rose to an annual rate of 5.5 percent in January 2020 – the highest in three decades.

MPC members are concerned that higher inflation will become normalised as a stalwart aspect of the UK’s economy, if businesses and households adapt to it and raise prices and wage demands to match.

“We need to take action to prevent that kind of persistence setting in,” said Dave Ramsden, a BoE deputy governor, in February 2020.

Catherine Mann, an external MPC member, said the committee ought “to front-load rate hikes” as a means “to offset or counter inflationary expectations”.

Whilst the UK economy quickly picked up following the Omicron variant of Coronavirus, energy prices will severely impact household incomes and business sentiment.

“It is a huge shock that is going to have a big hit,” said external MPC member Silvana Tenreyro. She further warned that attempts to return inflation to the BoE’s two percent target too rapidly could unseat the economy and lead to higher unemployment.