The biggest rise in interest rates for 25 years could lead to a confrontation at the bank | interest rates

Waiting for a lightning strike from the Bank of England. take delayed her decision Beyond a period of national mourning for the Queen’s death, Threadneedle Street this week may launch the largest increase in borrowing costs for at least 25 years.

Announcing her plans a day in advance Kwasi Kwarteng Friday’s Mini BudgetThe central bank is widely expected to use a rapid and aggressive rate hike to show its commitment to tackling high borrowing costs – despite the cumulative storm pulling off the UK economy.

City economists believe a 0.5 percentage point increase The bottom line, up from the current level of 1.75%, would be the seventh consecutive rate hike – the most severe tightening cycle since at least 1997 when Gordon Brown gave his first job as the bank’s independence minister to determine borrowing costs.

However, a tougher rise of 0.75 points can be used. Threadneedle Street won’t want to be left mired in the wake of the US Federal Reserve, as the US central bank is set to raise interest rates sharply on Wednesday following last week’s numbers. Show a more consistent picture of inflation in the world’s largest economy.

On this side of the pond, Inflation may have fallen in August from 10.1% in July but still close to its highest level since 1982 at 9.9% – nearly five times the bank’s target rate of 2% – amid soaring prices for food and other basic necessities.

Official numbers showed Unemployment has fallen to its lowest level since 1974While job vacancies remained high, giving the bank some indication of the strength of the economy despite looming recession risks. Annual wage growth picked up before inflation — a key metric the bank is watching — even as workers continued to feel miserable as inflation accelerated at a faster rate.

Financial markets estimate a nearly 90% chance of an increase in borrowing costs of 0.75 points, an increase unprecedented in 25 years of bank independence.

“The scale of the energy shock we’re seeing really can’t compare to anything we’ve seen, so it makes sense for monetary policy to act in an unprecedented manner,” said Modupe Adegbembo, economist at Axa Investment Managers. “Given market prices are up 75 basis points, not delivering that could add to sterling weakness.”

Over the summer, the pound fell to a 40-year low against the dollar, reflecting investor unease about the deteriorating economic prospects in the UK. Like other major European currencies, sterling has come under pressure from a stronger dollar, as well as worries about high inflation amid Russia’s war in Ukraine.

However, in the ugly competition in the currency market, Britain is particularly exposed. Investors believe Liz Truss is ramping up public borrowing to fund it £150 billion energy support package Things don’t help. Nor were threats made in the Tory leadership campaign To limit the independence of the bank.

Details of Truss support measures are expected to come out the next day in the mini-budget. Most economists expect that it will help reduce peak inflation and reduce the severity of a looming recession by putting more money in households’ pockets.

However, for the bank, it could mean more interest rate increases to get rid of the inflationary fallout from fueling the consumer economy. Financial markets expect the base rate to rise above 4.5% by next summer.

All of this constitutes a major clash between the government and the bank’s governor, Andrew Bailey, who has been in Truss’s line for some time, with a review of the central bank’s mandate expected this fall.

Bailey is unlikely to be sackable, given the tension in financial markets over Truss’ interference in the bank’s governance at a time of increasing public borrowing. But by squeezing the brakes as interest rates rise, just as he pays Truss to get the economy moving at all costs, a big battle in the Bank of England Everything but guaranteed.

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