Bank of England to impose another interest rate hike as UK inflation proves stubborn
The Bank of England is set to impose another interest rate hike on the UK economy today, the 12th consecutive increase in its battle to curb rampant inflation.
Both financial markets and economists widely expect a 0.25 percentage point rise to 4.5%.
The Bank Rate had stood at 0.1% in December 2021 before the tightening cycle began to tackle the pace of price rises, which were initially caused by economies getting back in gear after the COVID pandemic.
Russia’s invasion of Ukraine the following February then exacerbated the inflation problem, with soaring energy costs piling additional misery on western nations.
Those considerable extra costs, not only faced by households, are still filtering through in the form of stubborn inflation for many goods and services despite wholesale energy costs easing in recent months.
The latest official figures showed the headline consumer prices index (CPI) measure at 10.1% – fed by the highest grocery inflation for 45 years.
The bank will have also been concerned that higher-than-expected wage increases will embed inflation in the economy over the months ahead.
But there is good news on the CPI number just around the corner.
The inflation data for April is set to strip out the effects of the leap in household energy bills seen in April 2022 while fuel, which was also on the march at that time, is now well down on the levels seen in the same month a year ago.
Some economists predict a CPI number for April below 8% just because of the energy impact alone.
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This does not mean that prices are necessarily coming down and the cost of living crisis is over.
It is just that the contributions to inflation from the energy components are not so severe when it comes to measuring the pace of price increases over a 12-montn period.
Raising Bank Rate is a tool to reduce demand in the economy – to cool activity and help inflation ease back towards the Bank’s 2% target.
But there are consequences.
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April: Another interest rate rise ‘almost a done deal’
Chief among them is the impact on borrowers, especially households on variable mortgage deals or those who have had to secure a new fixed deal over the past year.
According to research by TotallyMoney and Moneycomms, a further quarter point interest rate rise will add £26 to monthly repayments for variable customers on the average UK property costing £270,708 with a 75% loan to value ratio.
The Bank rate increases, they said, meant the same customers were now facing forking out an extra £482 per month compared to pre-December 2021.
The Bank is mindful of the impact its actions are imposing on millions of households that are already struggling under the weight of meaty bills.
With that in mind, the remarks contained in the minutes of the Bank’s meeting and wider monetary policy report, all released at midday, will be crucial to understanding the likely way forward for borrowing costs.
The Bank is formally expected to raise its forecasts for economic growth as its staff no longer expect a recession this year but the outlook for Bank rate is a bit more clouded as inflation has proved more stubborn to bring down.
Bank governor Andrew Bailey’s comments to reporters will be especially closely watched for signs the rate-setting committee is edging towards a pause in its rate hikes.
The prospect of an end to the tightening will largely depend on the data ahead.
Andrew Hagger, personal finance expert at Moneycomms.co.uk, said: “Consumers and businesses will be praying that this is the last rate hike…. they will have their fingers crossed that inflation numbers will fall sharply before the next MPC (monetary policy committee) rate decision on 22nd June.
“Savers may be enjoying the best returns on cash savings for more than a decade but those with borrowing have been pushed to the brink by the financial impact of a dozen consecutive rate hikes.”
Is there method to the madness? Donald Trump and his acolytes would have you believe so.
The US president is standing firm among all the market chaos.
Just this weekend, after US stock markets suffered their sharpest falls since the onset of the pandemic, Trump reposted a video on his social media platform Truth Social. This was its title: “Trump is purposefully CRASHING the market.”
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The video claimed the president was engineering a flight to US government bonds, also known as treasuries – a safe haven in turbulent times. The video suggested Trump was deliberately throwing the stock market into chaos so investors would take their money out and buy bonds instead.
Why? Because demand for treasuries pushes up the price of the bonds, and that, in turn, lowers the yield on those bonds.
The yield is the interest rate on the debt, so a lower yield pushes down government borrowing costs. That would provide some relief for a government that has $9.2trn of government debt to refinance this year. Consumers also stand to benefit as the US Federal Reserve, the US central bank, would likely follow suit, feeling the pressure to cut interest rates.
A trader works on the floor at the New York Stock Exchange. Pic: Reuters
Trump and his treasury secretary, Scott Bessent, have made it a key policy priority to lower yields. For a while, it looked like the plan was working. As stock markets tumbled in response to Trump’s tariffs agenda, investors ploughed their money into bonds instead.
However, Trump may have spoken too soon. On Monday, the markets had a change of heart and rapidly started selling government bonds. Thirty-year treasury yields hit 4.92% on Wednesday, their biggest three-day jump since 1982. That means government borrowing costs are rising – and not just in the US. The sell-off has spiralled to government bonds worldwide.
Rachel Reeves will be watching anxiously. Yields on Britain’s 30-year government bonds, also known as gilts, hit their highest level since May 1998. They registered a 27 basis point jump to 5.642% today – that’s on track to be the largest one-day move since the aftermath of former prime minister Liz Truss’ “mini-budget” in October 2022.
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‘These countries are dying to make a deal’
This is a big deal. It is the sharpest sell-off in the US bond market since the pandemic. Back then, investors also rushed into bonds before dumping them and the motivations, on one level, are similar.
In 2020, investors sold bonds because they had to cover losses elsewhere in their portfolios. When markets fall, as they have done over the past few days, lenders can demand that an investor who has borrowed money stump up more cash against the value of their loan because the collateral against those loans has fallen in value. This is known as a “margin call”. Government bonds are easy to sell as investors “dash for cash”.
There are signs that this may be happening again and central banks, which had to step in last time, are alert.
The Bank of England warned today of the growing risks to financial stability. “A sharp increase in government bond yields could crystallise relatively quickly,” it said.
There are other forces weighing on government bonds. With policy uncertainty unfolding in the US, investors could also be signalling that US debt isn’t the safe haven it once was. That loss of confidence also seems to have hurt the dollar, one of the world’s safest places to park your money. It’s had a turbulent journey but is down 1.15% against a basket of safe haven currencies since Trump announced widespread tariffs on 2 April.
Some are even wondering if China could be behind some of this, dumping US government debt as a revenge tactic to hurt a president who has explicitly said he wants bond yields to come down. The country holds $761bn of US government bonds, second only to Japan. If this is the case, then the US-China trade war could rapidly be evolving into a financial war.
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