The Bank of England to Raise Borrowing Costs to Tackle Double-Digit Inflation
The Bank of England is set to make its final increase to borrowing costs in the current cycle next month to combat double-digit inflation, according to a Reuters poll. The British economy is almost certainly entering a recession, with the poll showing that the Bank of England will deliver another 25-basis-point hike on March 23, taking the rate to 4.25%.
The Bank of England Leads the Way in Raising Interest Rates
One of the first major central banks to begin lifting interest rates after the worst of the COVID pandemic, the Bank of England has already added 390 basis points to the Bank Rate. The U.S. Federal Reserve and the European Central Bank are also close to winding down their policy tightening campaigns, but are a little further from the end than the Bank of England.
Final Interest Rate Hike to be Delivered in March
The March median view for the Bank of England was held by around three-quarters of 49 respondents, with the final interest rate hike being delivered in March. However, there is still a risk that the Bank Rate ends higher than expected, with 11 of 15 respondents indicating this as a possibility.
MPC Members Offer Different Perspectives on Interest Rates
MPC member Jonathan Haskel has indicated that the Bank of England needs to be careful about the risk of high inflation becoming embedded. On the other hand, fellow MPC member Silvana Tenreyro believes that interest rates are already too high and she might consider voting for a cut in future meetings.
Inflation Eases but Still High
Inflation eased in December to a 10.5% annual rate, but January’s reading is expected to show that it was still over five times the Bank’s 2% target at 10.3%. The poll showed that inflation will drift down but won’t be at or under the target until the second quarter of next year.
Consumers Struggling with High Costs
Alongside elevated borrowing costs, consumers are struggling with high energy and food costs. Nearly two-thirds of respondents to an additional question said it would be at least six months before the cost-of-living crisis eased significantly.
British Economy Expected to Contract
The Bank of England has had to raise interest rates even though the economy has struggled after a post-pandemic boost faltered amid the cost-of-living crisis. The economy will contract 0.4% in each of the first and second quarters and then shrink 0.1% in the following one, exceeding the technical definition of recession, medians in the poll showed. The economy will end this year 0.8% smaller than it started 2023, and then expand 0.8% next year, which is a bigger contraction than the 0.6% predicted by the International Monetary Fund last month.