On Thursday, the Bank of England’s Monetary Policy Committee (MPC) will decide whether to increase its base rate further in light of rocketing inflation. The base rate has already increased to its highest level in 13 years, with incremental rises since December in a bid to tackle inflation. There is now speculation over just how far the Bank of England will go in terms of monetary tightening.
It seems inevitable that the bank will increase interest rates by 0.25% this week, but some believe that the bank could go a step further and increase the base rate even more than this. Over recent weeks, several central banks have hiked interest rates by 50 basis points, including those in Australia and the United States. This was despite many economists and experts expecting smaller increases.
Currently, most UK economists are expecting the BoE to raise rates by 0.25%. Still, they have not ruled out the possibility of the bank following in the footsteps of others with a more significant increase. This comes as recent data shows that public opinion of Threadneedle Street’s control of inflation has fallen to the lowest level on record.
A response to support packages
As inflation continues to soar and sits at its highest level in decades, the government has put various support packages into place. This includes plans to cut taxes and a range of household support packages. The packages already implemented or set to land throughout 2022 include the £150 council tax rebate for qualifying households, a £400 energy bill reduction for all homes, and a £650 hike in benefits for lower-income individuals and families.
In total, the support packages amount to £15 billion, with a partial offset coming from a £5 billion windfall tax on profits from North Sea energy providers. Experts have said that the MPC needs to work out whether this support package will require a monetary policy response.
Allan Monks, chief UK economist at JPMorgan, said that the government’s support packages would “strengthen the MPC’s conviction about [monetary] tightening”.
Another industry expert, Paul Dales, chief UK economist at Capital Economics, said the packages added to inflationary pressure and resulted in a weaker pound. He said, “As a result, the Bank of England will have to work harder if it is going to bring CPI inflation from April’s 40-year high of 9 per cent back down to the 2 per cent target.”
Some believe that Prime Minister Boris Johnson is recklessly spending money to improve his popularity in light of public opinion. However, experts fear this will make it all the more difficult to bring inflation down to a manageable level without the BoE taking more drastic measures.