Bank of England Faces Acute Policy Dilemma as It Prepares to Raise Interest Rates

Strategic Insights -

The Bank of England is set to raise interest rates for the 10th consecutive time, taking borrowing costs to 3.5%, as it grapples with an acute policy dilemma. With the economy showing signs of weakening and inflation still above 10%, the central bank is under pressure to act decisively to bring prices back down to its 2% target. However, with six members of the Monetary Policy Committee (MPC) wanting to raise rates by 0.5 points, two wanting them left unchanged, and one voting for a 0.75 point increase, the committee is divided between those who think raising rates further risks overkill and those who think tough action now will avoid the need for even tougher action later.

Key Takeaways:

  • The Bank of England has raised interest rates at each of its last nine meetings, taking borrowing costs from 0.1% to 3.5%.
  • The economy is showing signs of weakening, with higher mortgage costs taking the heat out of the housing market and business failures rising.
  • Inflation, as measured by the consumer prices index, has fallen back only slightly and is still above 10%.
  • The interest-rate hawks are concerned by core inflation, which excludes energy and food, running at above 6%.
  • The Bank of England is likely to be less downbeat than it was three months ago, due to the financial markets calming down and global energy prices falling.
  • The MPC is split between those who think raising rates further risks overkill and those who think tough action now will avoid the need for even tougher action later.
  • David Blanchflower, a former member of the MPC, has said that he would vote for a one percentage-point cut in interest rates, while Andrew Sentance has suggested a half-point increase to 4%.

Statistics:

  • Interest rates have been raised by 3.5 percentage points in nine consecutive meetings.
  • The economy is expected to contract by 0.6% this year, according to the International Monetary Fund.
  • Core inflation, which excludes energy and food, is running at above 6%.
  • Wholesale gas prices have fallen by a significant amount in the last few months.
  • Investors expect Bank rate to peak at around 4.25%, down from 5.25% three months ago.
  • The Bank of England is expected to raise interest rates for a 10th consecutive time, with attention turning to whether an 11th and even a 12th successive rate rise is in prospect.

Sources:

  • "A warning for consumers: the cost of living is about to rise even more", by Larry Elliott, The Guardian, [not specified]
  • "Bank of England raises interest rates for ninth time in a row", by Larry Elliott, The Guardian, [not specified]
  • "UK economy to contract by 0.6% this year, says International Monetary Fund", by Larry Elliott, The Guardian, [not specified]
  • "Bank of England's growth forecast to be revised down", by Larry Elliott, The Guardian, [not specified]
  • "Former Bank of England governor Lord Mervyn King on why he thinks the central bank should be boring", by [not specified], The Guardian, [not specified]