Rate hike ‘odds on’ as inflation climbs

Fear over vicious circle of surging wages and prices

THE Bank of England is expected to hike its base rate up by 0.15 percentage points to 0.25 per cent on Thursday, in a bid to curb rising inflation.

Its Monetary Policy Committee is tipped to lift the base rate, which has been at 0.1 per cent since February 2020 to support the economy through Covid-19, because inflation rose from 0.4 per cent in February to 3.1 per cent last month.

The Office for Budget Responsibility forecasts CPI inflation rising to 5 per cent in 2022, its highest level in three decades.

Average annual pay growth has been rising over the last 16 months and with prices rising, the Bank’s MPC is believed to be ready to hike rates as it is worried about the prospect of Britain being trapped in an inflationary vicious circle.

By raising its base rate now, before next year’s pay settlements are finalised, economists say the MPC is heading off a situation where rising prices push wage agreements higher, which in turn forces prices higher, as companies need to charge more to pay for pay hikes.

Janus Henderson Investors economic adviser Simon Ward said: “A rate hike is odds on, given that the MPC has marched us all the way up the hill, it would be very odd if they did not follow through with a hike. They will probably raise it by 15 basis points, as a number of members on the committee are dovish.

“I think they will want to get back to 0.75 per cent, the pre-covid-19 level, as quickly as possible so it looks like we’ll have rate hikes in quick succession, as they are worried about inflation expectations feeding through into wages.” Paul Dales, Capital Economics’ chief UK economist, agreed: “Overall, the MPC appears more worried about the upside risks to inflation from rising underlying wage growth and higher inflation expectations than we thought just a month ago.

“We don’t think anyone can say with much certainty when the first rate hike will come, but we’ve pencilled in a rise from 0.1 to 0.25 per cent in November and a rise to 0.50 per cent in February.”

Philip Shaw, chief economist at investment bank Investec, said: “The direction of travel from the MPC is that it is more worried about inflation than the risks of the economy stagnating, so it looks like we’ll get a rate hike.”

EY ITEM Club senior economic adviser Martin Beck said the MPC may hold fire on a rate hike, pulling the trigger in February: “I think they will wait as the risks of doing so are not high, versus the risk of going too early. However the supply chain problems are still here, energy prices are rising, so the inflationary pressures are not going to go away.”