The Bank of England, which is being criticized for having been too timid in the face of record inflation in the United Kingdom, might opt Thursday for a rate hike of a magnitude more seen since 1995, at the risk of penalizing activity. economic.
Inflation accelerated further in June to 9.4% over one year, a 40-year high, fueling a cost-of-living crisis that particularly threatens the poorest British households.
Governor Andrew Bailey assured in a speech at the end of July that a rate hike of 0.50 percentage points was on the table. This would be the largest increase since 1995, which would take the British key rate to 1.75%.
The British central bank would thus follow in the footsteps of the American Federal Reserve (Fed) and the European Central Bank (ECB), which decided in July to increase their key rates by 0.75 and 0.50 percentage points, respectively. .
Soaring gas prices, caused by the war in Ukraine, as well as disruptions to supply chains and a tight labor market from the cocktail of Covid-19 and Brexit are helping to accelerate inflation.
Political pressure
‘Energy prices continue to climb, fueling our prediction that Ofgem’s price cap will rise further, and force the BoE to revise a new times (upward) its inflation forecasts’, comments Fabrice Montagné, economist at Barclays.
For now, the BoE expects inflation to peak at over 11% year-on-year in the final months of the year.
The cost of living crisis has led many observers to criticize the BoE’s perceived wait-and-see attitude, even though it was among the first to start raising rates at the end of 2021.
The policy of the central bank was notably invited in the debates between the candidates for the succession of Prime Minister Boris Johnson, who agree to estimate that the monetary institution should have acted more quickly.
Faced with these criticisms, Mr. Bailey reiterated the importance of the independence of the BoE.
‘We believe that the Bank must act vigorously in the face of inflation risks, or it might lose control,’ warns Montagné in a note.
Growth risk
The Bank of England is also expected to specify on Thursday how it intends to sell the bonds it bought under its asset purchase program (quantitative easing, or QE), another way to limit liquidity on the market.
But the acceleration of the tightening of monetary policy is not unanimous: some economists wonder if the BoE does not risk stifling growth.
For now, economic activity remains in the green in the United Kingdom, but it has been sluggish for several months and was in July at its lowest level since the winter lockdown of 2021, according to the PMI index. Flash Composite of S&P Global and CIPS, considered a barometer of growth.
‘With demand slowing both locally and internationally, we expect producer price inflation to slow by the end of the year, which should reduce the need to tighten the monetary policy’, estimates for his part Martin Beck, economist of the EY ITEM Club.
Beware, however, of the risk of a surprise: the monetary policy committee has been criticized in the past for its sometimes convoluted communication ahead of its decisions, even if it means destabilizing the British debt market.
The predecessor of Mr. Bailey, Mark Carney, had thus been decked out with the nickname of ‘unreliable boyfriend’, a reputation which the BoE is struggling to get rid of.
/ATS
