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The Bank of England is set to announce its seventh interest rate hike in less than a year on Thursday as it battles the highest level of inflation of any G7 economy.
Market opinion is divided on whether the central bank will repeat last month’s half-point hike – the biggest increase in 27 years – or opt for a three-quarter-point hike.
Economists polled by Reuters last week expect the bank to hike rates to 2.25% from 1.75%, while financial markets have forecast a bigger move to 2.5%.
Either way, the Bank of England will raise borrowing costs for businesses and consumers to levels last seen in 2008 in a bid to dampen inflation which continues to hover just in below 10%.
Like most of its major peers, the central bank must weigh the need to prevent price increases from spiraling out of control and the damage caused by aggressive rake hikes. Some economists believe the UK economy is already in recession.
His decision is made even more difficult by the weakness of the pound, which on Wednesday fell to a new low in 37 years against the American dollar. A weaker currency means the UK has to pay more for imported energy and food, adding to inflationary pressures in the economy.
The U.S. Federal Reserve on Wednesday announced a historic third consecutive three-quarters percentage point hike in interest rates, adding new life to the sails of the dollar. US benchmark rates are now between 3% and 3.25%, compared to 1.75% in the UK.
The European Central Bank also broke new ground when it last decided this month to raise eurozone interest rates from 0% to 0.75%.
A likely sharp increase in UK government spending to reduce exorbitant business and household energy bills further clouds the outlook for the Bank of England.
Britain’s Finance Minister Kwasi Kwarteng will outline the cost of the subsidy program on Friday, but analysts have already estimated the bill could reach £150 billion ($170 billion) over the next two years.
Combined with the tax cuts promised by new Prime Minister Liz Truss, this could keep inflation high for the next few years and send UK government borrowing skyrocketing.
In a report on Wednesday, the Independent Institute for Fiscal Studies warned that the government risked putting Britain’s debt “on an unsustainable path”.
“At about 3.5% of national income, borrowing would be nearly double the 1.9% of national income it averaged in the 60 years before the global financial crisis, when growth prospects were considerably higher,” he said.
Interest rates: the Bank of England plans a seventh hike since December
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