Is Bank of England about to break precedent on interest rates?
The US Federal Reserve has done it. The European Central Bank has done it. Now the Bank of England must decide whether to follow suit and opt for a bigger than usual rise in official borrowing costs when it meets on Thursday.
After edging rates up by a quarter-point at a time, the financial markets are betting that Threadneedle Street’s monetary policy committee (MPC) will announce a 0.5 percentage-point jump this time, something that has never happened since the Bank was granted independence in 1997.
The previous time interest rates were raised by such a margin, John Major was the prime minister, Ken Clarke was the chancellor and Eddie George was the Bank of England governor. That was back in 1995, when the Treasury still had the final say over interest rates.
If the Bank does break new post-independence ground, it will not just be because the annual inflation rate is at a 40-year high of 9.4% and expected to rise further over the months ahead. Nor will it be simply a matter of playing catch-up after repeatedly underestimating price pressures, even though that is a factor. This time last year, the MPC was forecasting that inflation would peak in late 2021 at just 4%.
Rather, the jump will be because the Bank’s fear of inflation becoming embedded in the economy outweighs concerns that the economy is about to enter recession or, indeed, may already be in one. David Blanchflower, a former MPC member, has said he believes the UK is in the early stages of a recession that began some months ago.
What makes the committee’s job more difficult is that the economy is giving off mixed signals, as is often the case at a key turning point. Unemployment is back to low levels last seen in the 1970s and there are record job vacancies.
Some
Read more on theguardian.com
