Governor Andrew Bailey assured in late July that a rate hike of 0.50 percentage point was on the table.
The Bank of England (BoE) could follow the example of other central banks on Thursday and accelerate its rate hikes in the face of worsening inflation, at the risk of penalizing economic activity.
British inflation accelerated further in June, to 9.4% over one year, a record in 40 years, fueling a crisis in the cost of living which particularly threatens the least wealthy British households.
“After July’s boosted increases by the European Central Bank and the US Federal Reserve (by 0.50 and 0.75 percentage points respectively, editor’s note), the Bank of England will probably also feel compelled to increase the put in August”, judge the analysts of BNP Paribas in a note.
Governor Andrew Bailey assured in a speech at the end of July that a rate hike of 0.50 percentage point was on the table. This would be the largest increase since 1995, which would take the British key rate to 1.75%.
Soaring gas prices, caused by the war in Ukraine, as well as disruptions to supply chains and a tight labor market from the cocktail of Covid-19 and Brexit are helping to reinforce inflation.
Energy prices “continue to climb, which feeds our prediction that the price cap of Ofgem (the British electricity market regulator, editor’s note) will rise further, and force the BoE to revise a new time [à la hausse] its inflation forecasts”, comments Fabrice Montagné, economist at Barclays.
For now, the BoE expects inflation to peak at over 11% year-on-year in the final months of the year.
The cost of living crisis has led many observers to criticize the BoE’s perceived wait-and-see attitude, even though it was among the first to start raising rates at the end of 2021.
The policy of the central bank was notably invited in the debates between the candidates for the succession of Prime Minister Boris Johnson, who agree to estimate that the monetary institution should have acted more quickly.
Faced with these criticisms, Mr. Bailey reiterated the importance of the independence of the BoE.
“We believe that the Bank must act vigorously in the face of inflation risks, or it could lose control,” warns Mr. Montagné in a note.
The Bank of England is also expected to specify on Thursday how it intends to sell the bonds it bought under its asset purchase program (“quantitative easing”, or QE), another way to limit liquidity. on the market.
But the acceleration of the tightening of monetary policy is not unanimous: some economists wonder if the BoE does not risk stifling growth.
For now, economic activity remains in the green in the United Kingdom, but it has been slowing for several months and was in July at its lowest level since the winter 2021 lockdown, according to the PMI index. Flash Composite of S&P Global and CIPS, considered a barometer of growth.
“With demand slowing both locally and internationally, we expect producer price inflation to slow by the end of the year, which should reduce the need for tightening. monetary policy,” said Martin Beck, economist at the EY ITEM Club.
Beware, however, of the risk of a surprise: the monetary policy committee has been criticized in the past for its sometimes convoluted communication ahead of its decisions, even if it means destabilizing the British debt market.
The predecessor of Mr. Bailey, Mark Carney, had thus been decked out with the nickname of “unreliable boyfriend”, a reputation which the BoE is struggling to get rid of.
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