An increase in interest rates from 0.75 per cent to 1 per cent would mean that the BoE would reach a self-imposed threshold to reveal the next steps in its plan to reduce the accumulated billion-pound assets to 12 years of quantitative easing after the financial crisis. Financial markets had expected the BoE Monetary Policy Committee to raise interest rates by half a percentage point this week, but have shown signs of revising their calculations in recent days, with most economists now forecasting a 0.25 percentage point increase. unit. The consensus among economists is that the MPC will decide to move more cautiously as UK households are squeezed by inflation, leading to lower demand and slower economic growth. The pressure on the BoG to tighten monetary policy stems from persistent and widespread price increases along with a tight labor market and the disruption of global supply chains caused by Russia’s invasion of Ukraine and the coronavirus pandemic. More uncertainty surrounds the BoE’s intention to ease quantitative easing, but some economists expect the central bank to announce at least one plan to start selling assets sometime this year. Bank of America analysts said any rate hikes would not prevent inflation from rising to around 9% this year, with some economists, including those of Capital Economics, expecting price increases to double-digit in the autumn. Consumer price inflation hit a new 30-year high of 7 percent in March. However, the need for aggressive action to curb inflation is offset by signs of weakening demand, as households struggle with rising energy bills alongside broad-based increases in the prices of goods and services. Chris Hayes, an economist at HSBC, said: “There is a growing argument that the energy shock caused by inflation today – insofar as it compresses real incomes – means lower inflation tomorrow.” The prospect of a squeeze on revenue that will blow the wind out of the economy is something that worries Andrew Bailey, the BoE governor. Speaking on the sidelines of the IMF and World Bank spring meetings last month, he said the MPC was “walking a very narrow line” between tackling inflation and not pushing prices “too low”. Economic data last week further strengthened the argument that inflation is beginning to slow down economic activity. UK retail sales data for March showed that volumes fell more than expected by 1.4 percent – one of the first signs that high prices are having a negative impact on consumer spending. GDP growth slowed to just 0.1 percent in February, from 0.8 percent in January. Not all economists are convinced, however, that a weakening economy will drive down prices, with some predicting a very real risk of prolonged stagnation – a term used to describe a period of low GDP growth and persistently high inflation. Ruth Gregory, an economist at Capital Economics, said: “Various indicators tell us. . . that the effects of the second round of the initial inflation shock could keep inflation beyond that of the bank [2 per cent] interest rate target despite the weaker economy “. He added that the shortage of migrant workers due to Brexit, along with the significant drop in labor force participation after the pandemic, would keep the labor market tight and boost wage inflation. “Rates need to rise further, despite the risk of recession, in order to ‘lean against the risk of inflation becoming sticky as wages rise,’” Gregory said. As the MPC seeks to strike a balance between curbing inflation without putting too much strain on GDP growth, it will have to decide whether to start active sales of its government bonds. In August 2021, the MPC decided that achieving a 1 percent interest rate would be the limit at which it would “actively consider” the sale of female gold in its books. In February this year, it stopped reinvesting bond maturity maturing when interest rates rose to 0.5%, a clear signal that its balance sheet will begin to shrink in size. Given the maturity of its current government bonds, a “passive” easing would be slow and reaching the 1 percent interest rate threshold would give the MPC a chance to increase the rate at which it shrinks the central bank’s balance sheet. However, economists expect the MPC to be wary of disrupting markets. Bailey said last month that the BoE would not “sell bonds in a fragile market” and would be flexible in changing “economic conditions”. The BoE may feel it has time on its hands, as unlike the US Federal Reserve, it has shown no willingness to use a balance sheet cut to try to increase the government’s long-term borrowing costs, James Smith said. , economist at ING. The BoE’s focus is more likely to be on achieving a “equilibrium level” of government bonds that leaves enough reserves for commercial banks to meet demand for money, according to Sanjay Raja, an economist at Deutsche Bank. The BoE has not indicated what that level will be, but Bailey has repeatedly said it would be significantly higher than it was before the financial crisis.
