Bank of England under 'great pressure' to hike interest rates as inflation at 30-year high


As revealed by the Office for National Statistics this morning, inflation now stands at 5.4 percent- the highest in nearly 30 years. Worryingly inflation is still some way from peaking with the Bank of England previously predicting it would reach up to six percent in April. Some analysts now believe it may in fact prove closer to seven percent. For the Bank of England, whose target is two percent, today’s figures add growing pressure over interest rates with the next decision due in just over two weeks.

Writing on Twitter, former member of the Bank’s Monetary Policy Committee (MPC) Andrew Sentance wrote: “Surely #MPC cannot continue to discount this inflation surge.

“Further interest rate rises will be needed this year and next.”

Ed Monk, associate director at Fidelity International, said some economists were predicting multiple rate rises this year with the Bank feeling “great pressure” to act.

In December the Bank of England voted to raise interest rates for the first time since the pandemic began, raising them from 0.1 percent to 0.25 percent.

The expectation now is that they would rise in increments of 0.25 percent meaning a rate hike on February 3rd would see them move to 0.5 percent.

At the start of the pandemic interest rates were cut from 0.75 percent which is still low by historic standards.

Guy Foster, Chief Strategist at wealth manager Brewin Dolphin, commented: “For prices to be rising so fast, after a year in which the Bank of England have had such an inflationary policy setting, is a valid challenge to its credibility.”

Previously the Bank has held back from increasing rates over fears over the strength of the job market and the risk of choking recovery as the UK emerges from the pandemic.

There has also been suggestion some elements of the current price rises may be transitory being linked to temporary surges in demand and supply chain shortages as economies power up again after lockdown.

Fears over the health of the job market were put aside this week though when ONS figures revealed the number of employees on payroll surging past pre-pandemic levels with unemployment and redundancies also falling.

Melanie Baker, Senior Economist at Royal London Asset Management, commented: “The pressure is building for another rate rise from the Bank of England in February.

“Many of the sources of rising inflation could still be described as transitory, but with inflation surprising on the upside by so much, with core inflation higher and at such a high level, worries about inflation expectations are also likely to build.”

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Charles Hepworth, Investment Director at GAM Investments, said: “In common with other central banks around the world, the Bank of England has left it very late to get ahead of this inflation problem, now at almost triple their target level, and it should have been reacting early into last year.

“The odds of another rake hike next month now look to be shortening.”

While the Bank of England acted in December with its first rate rise the European Central Bank (ECB) has shied away from such a move.

ECB President Christine Lagarde has previously insisted rates will not move until 2023 despite Eurozone inflation reaching five percent.

US central bank the Federal Reserve has also been holding interest rates though speculation is now growing of multiple rate hikes this year, with the first expected in the next couple of months.


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