The Bank of England is expected to raise interest rates to 0.75 percent on Thursday, its third rate increase in a row, as it strives to manage a sharp rise in inflation exacerbated by Russia’s invasion of Ukraine.
A quarter-point rate hike on March 17 would bring borrowing costs to where they were before Britain was slammed by COVID-19 two years ago, but it is unlikely to be the Bank of England’s last.
With a 0.25 percent hike in December, the Bank of England became the first major central bank to raise interest rates since the outbreak began. Along with the 0.5 percent increase in February, it also began to gradually reverse its 895 billion pounds ($1.17 trillion) in bond purchases.
The Federal Reserve of the United States is poised to begin raising interest rates on Wednesday, while the European Central Bank said this week that its bond-purchasing stimulus would end in the summer.
Before Ukraine was attacked, the Bank of England predicted that consumer price inflation would peak at around 7.25 percent in April, when household energy rates are set to climb by more than half.
Economists now predict that inflation will top 8% later this year, reaching its highest level since the early 1980s. The cost of natural gas used to heat most British homes is now 60 percent higher than it was before the February summit.
Higher interest rates will not halt the short-term rise in inflation, and the rise in energy prices will put pressure on British living standards, ultimately lowering inflation.
However, the Bank of England believes that raising interest rates now is vital to prevent the risk that high inflation becomes baked into longer-term expectations, which was a costly problem in the early 1990s when inflation was this high in the UK.
“I believe it’s incredibly difficult for the Bank right now to get this right,” said James Smith, a former Bank of England economist who is now research director at the Resolution Foundation think tank.
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