Experts are warning that the Bank of England is likely to take further action regarding interest rates following today’s announcement regarding inflation. It was an unexpected rise from the month before and makes it likely the Bank of England will raise interest rates once again to tame inflation.
The central bank has raised the UK’s rate ten consecutive times in the past year and looks set to do so for an eleventh time tomorrow.
As it stands, the base rate is at four percent and experts suggest a rise to 4.25 percent is now “locked in” for when the Bank of England’s Monetary Policy Committee (MPC) meets tomorrow.
According to the Office for Budget Responsibility (OBR), inflation is expected to drop below three percent by the end of 2023.
Prime Minister Rishi Sunak has previously promised to slash inflation this year in a bid to win back voters and bolster the economy.
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Joshua Raymond, director at online investment platform XTB.com, discussed the market reaction to today’s news and what that could mean for the Bank of England’s decision-making tomorrow.
He explained: “We’ve seen a jump in demand for the pound this morning after those surprising inflation numbers, with investors lifting the pound by more than 0.5 percent against the US dollar to its highest level since the start of February.
“With inflation coming in much stronger than expected, it could force the Bank of England to adapt its position on UK interest rates.
“Much of the market expects the UK central bank to hike rates by another 0.25 percent tomorrow when the MPC announces its next rate-setting decision.”
However, the finance expert highlighted that further interest rate increases after tomorrow may become less common due to external pressures.
Mr Raymond added: “This inflation report effectively locks that rise in. Yet perhaps the most important aspect this surprising jump in inflation does is re-paint the potential landscape for falling inflation in the coming months.
“Its widely expected inflation will fall by around 50 percent by the end of the year.
“Yet what this reading shows is that fall will likely be volatile, keeping the BoE on its toes.
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“Given the fragility of confidence in European banks, central banks are more likely to want to hit pause on rate hikes if they can afford to.
“If inflation remains stubbornly high, this makes that wish harder to realise.”
Due to the central bank’s intervention, high-street financial institutions have partially passed on this rate hike to their customers.
This has been a boon for savings accounts with banks such as Santander and NatWest boosting the interest rates of their products.
However, homeowners and people in debt have seen their repayments skyrocket over the last year as a result of the base rate going up.
The central bank’s MPC is aiming for inflation to drop to around two percent by the end of the year to help facilitate sustainable growth and employment.
During the group’s last meeting, the MCP voted by a majority of 7-2 to raise interest rates by 0.5 percentage points.
However, two members opted to keep the Bank of England’s base at its previous level of 3.5 percent.