London (awp/afp) – Faced with persistent inflation in the United Kingdom, the Bank of England is expected to announce a further substantial increase in its key rate on Thursday, even if it means stifling the growth that the government is trying to revive.
The monetary institute should therefore at least raise its rates to 2.25%, an increase of 0.5 percentage point, as in August, which was a first since 1995.
Some economists even believe that it could follow in the footsteps of the European Central Bank (ECB) and the American Federal Reserve (Fed) by raising its rate by 0.75 points, as the two largest central banks did in september.
In a busy day for central bankers, the monetary institutes of Norway and Switzerland also raised their rates on Thursday, by 0.5 points for the former and by 0.75 points for the Swiss central bank, which thus puts an end to more than seven years of negative rates.
The Bank of Japan distinguished itself by maintaining an ultra-loose monetary policy on Thursday, leading to a plunge in the yen against the dollar and intervention by the Japanese government to support the currency.
In the United Kingdom, it would be the strongest tightening of monetary policy for three decades.
At 9.9% over one year in August, a record among the G7 countries, inflation is weighing down the British economy and threatens to plunge the country into a recession in 2023, according to the latest forecasts from the BoE.
Paul Hollingsworth, BNP Paribas analyst, judges “the arguments in favor of a 75 basis point increase more convincing than those for a 50 point increase”.
Government pressure
“The crucial news since the last meeting is new Prime Minister Liz Truss’s fiscal package, which should limit inflation in the short term but boost it in the medium term,” he added.
New Chancellor of the Exchequer Kwasi Kwarteng is due to detail a plan to help households and businesses on Friday which is expected to include an energy price freeze and is expected to cost more than £100 billion.
While this will mechanically lead to a fall in prices and therefore inflation, the measure could push households to consume more and therefore boost it in the longer term, causing the BoE to be more firm.
The central bank therefore risks acting against the tide of the government in place while reproaches accumulate against the monetary institute, criticized in particular by Liz Truss and by Kwasi Kwarteng for not having prevented inflation from blazing in the highest in 40 years.
During her campaign to succeed Boris Johnson, Liz Truss proposed reviewing the status of the Bank of England, whose independence dates back to 1997. She then felt that the BoE should have acted sooner, even if the increases in rates started at the end of 2021 in the United Kingdom, before those of the Fed and the ECB.
Central bank governor Andrew Bailey defended himself in early September, saying inflation was mainly due to the UK being ‘heavily exposed’ to soaring gas prices due to its dependence on this source energy, the supply of which is hampered by the war in Ukraine and the limitation of Russian exports.
Debt burden
From now on, the government could on the contrary blame the central bank for rate hikes which make borrowing more expensive for the British but also for the State.
Against this backdrop, Barclays analysts believe the BoE will stick to a 0.5 point hike and could start signaling a slowdown in monetary policy tightening by the end of the year.
Another question on the table, the British monetary institute could announce the start of net sales of the debt it holds as part of its massive program of asset purchases (quantitative easing or QE), in order to reduce its bloated balance sheet. by the pandemic.
The monetary policy committee had mentioned bond sales representing 80 billion pounds over one year from September, which could make the debt issued by the State even less attractive.
While indications on the inflation outlook should appear in the BoE’s press release, the precise forecasts of the monetary institute will not be updated before the October meeting.
In August, the BoE predicted a peak in inflation at 13% in October and a recession in 2023.
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