Interest rates: Bank of England set for seventh hike since December




London
CNN Business
 — 

The Bank of England is expected to announce its seventh interest rate hike in less than a year on Thursday as it battles the highest level of inflation of any G7 economy.

Market opinion is divided over whether the central bank will repeat last month’s hike of half a percentage point — the biggest increase in 27 years — or go for a three-quarter point rise.

Economists polled by Reuters last week expect the bank to raise rates to 2.25% from 1.75%, while financial markets have priced in a bigger move to 2.5%.

Either way, the Bank of England will raise borrowing costs for business and consumers back to levels last seen in 2008 in a bid to take the heat out of inflation that continues to hover just below 10%.

Like most of its major peers, the central bank is having to weigh the need to prevent price rises getting out of hand and the damage caused by aggressive rake hikes. Some economists believe the UK economy is already in a recession.

Its decision is being made harder still by the weak pound, which fell to a new 37-year low against the US dollar on Wednesday. A weaker currency means the United Kingdom has to pay more for imported energy and food, adding to inflationary pressures in the economy.

The US Federal Reserve on Wednesday announced an historic third consecutive three-quarter percentage point rise in interest rates, adding further wind to the dollar’s sails. Benchmark US rates now stand at between 3% and 3.25%, compared with 1.75% in the United Kingdom.

The European Central Bank also broke new ground with last its decision earlier this month to hike eurozone interest rates from 0% to 0.75%.

Further clouding the outlook for the Bank of England is a likely big increase in UK government spending to slash the sky-high energy bills of businesses and households.

UK finance minister Kwasi Kwarteng will outline the cost of the subsidy program on Friday, but analysts have already estimated the bill could reach £150 billion ($170 billion) over the next two years.

Combined with tax cuts promised by new Prime Minister Liz Truss, that could keep inflation high over the next few years and send UK government borrowing soaring.

In a report published Wednesday, the independent Institute for Fiscal Studies warned that the government risked setting UK debt “on an unsustainable path.”

“At around 3.5% of national income, borrowing would be not far off double the 1.9% of national income that it averaged over the 60 years prior to the global financial crisis, when growth prospects were considerably higher,” it said.



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