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The Bank of England is poised to further raise interest rates on Thursday, but it faces an intensifying dilemma as the Ukraine war poses threats to inflation and economic growth.
Given the growing uncertainty, experts now predict inflation could sail past the bank’s 7.25 per cent prediction to above 8 per cent in April — or even double digits — as the Ukraine crisis and sanctions imposed on Russia send fuel and energy prices rocketing even higher.
While the bank is under pressure to raise rates to bring inflation under control, it is expected to be more cautious given the precariousness of the economic outlook.
The bank has already raised rates twice in the past three months, with the latest quarter-point rise to 0.5 per cent in early February being accompanied by warnings of more to come.
But Russia’s invasion of Ukraine has led to financial markets slashing their expectations for rate rises this year, with central banks in the UK and across the world predicted to tread far more carefully.
Most economists still expect the Bank of England to raise rates to 0.75 per cent at this month’s meeting. However, it is not predicted to follow this with a rapid series of increases as it faces the prospect of a slowing economy.
There are fears growth may come under pressure in the second quarter and beyond as the cost-of-living crisis and conflict in Ukraine weigh on confidence.
“The double whammy is that these super-high prices affecting oil, metals and grains may be hard to bear for companies and consumers, leading to less spending and investment, and could push the recovery into reverse,” said Susannah Streeter, a senior investment and markets analyst.
“Steering inflation back to the target of 2 per cent is still set to be its priority and it’s still highly likely a rate rise will be on the cards next week.
“But given the escalating situation, with fresh sanctions being placed on Russian oil exports, policymakers are expected to limit the rise to 0.25 per cent … to try and dampen demand but not squeeze life out of the economy.”
Bank of England Governor Andrew Bailey has admitted there is little monetary policy can do to influence global commodity prices, but said upon raising rates in February that cost pressures “would be even worse” if it did not take action.
The EY Item Club, a UK economic forecasting group, believes the bank will pause after rates reach 1 per cent this year. Martin Beck, its chief economic adviser, said an increase this month is most likely but stressed that “even for the case for a rise in the next meeting is not clear-cut”.
“As Governor Andrew Bailey has stressed, there is nothing UK monetary policy can do to increase the supply of gas and other commodities.
“And changes in interest rates take 12 to 18 months to have their peak effect. So hikes now may kick in at a point when base effects and falling energy prices mean inflation has fallen back sharply.”
