Will the Bank of England push rates up with war set to drag spending power down?
Soaring gas and electricity prices, high inflation, the worst squeeze for living standards in decades … The economic outlook was challenging even before Russia’s invasion of Ukraine. Now conflict on European soil and economic warfare through sanctions has added to the pressure.
This week the Bank of England is expected to raise interest rates in response to inflationary pressures, as the war pushes up already high energy prices. It will be adding to the cost-of-living crisis by increasing the cost of borrowing, but the idea is to stop high rates of inflation becoming more permanent.
Threadneedle Street’s nine-member monetary policy committee (MPC) is likely to vote for a rise from 0.5% to 0.75%, lifting borrowing costs back to pre-pandemic levels for the first time. Some of its more hawkish members may push for a bigger rise, to 1%, which would be the highest rate since the 2008 financial crisis.
While all of this was likely before the first Russian tank rolled into Ukraine, Vladimir Putin’s war has complicated an already delicate balancing act for the central bank.
With the impact of western sanctions and Russian countermeasures driving up the cost of oil and gas on international markets, inflation is now set to peak at higher than the 7.25% forecast by the Bank for April, and stay at elevated levels for longer than first thought.
Some economists have spoken of inflation peaking close to 10%, compounding an already bitter cost-of-living crisis by adding to energy bills and driving up the cost of petrol and diesel to record levels.
Until Putin’s invasion, Britain’s economy was holding up better than had been expected. Official figures show gross domestic product (GDP) rose at a faster rate in January than City economists had
Read more on theguardian.com
