Bank: inflation to stay high into next year

Bleaker outlook as panel prepares to make biggest increase in interest rates for 27 years today

The Bank of England will today be forced to admit that inflation will remain high for longer than previously predicted as it increases interest rates for the sixth time in a row. Andrew Bailey, the Governor, is expected to release forecasts showing inflation will still be well above 10 per cent in 2023 as Britain is confronted by soaring energy bills sparked by the war in Ukraine. The Bank is expected to raise interest rates by 0.5 percentage points, its biggest increase in 27 years.

THE Bank of England will today be forced to admit that inflation will remain high for far longer than previously predicted as it increases interest rates for the sixth time in a row.

Andrew Bailey, the Governor, is expected to unveil forecasts showing inflation will still be significantly above 10pc in 2023 as Britain battles soaring energy bills sparked by war in Ukraine.

Markets are betting the Bank will raise interest rates by 0.5 percentage points in an effort to combat surging prices, its biggest increase in 27 years.

Policymakers will also announce plans to start selling the £850bn mountain of government debt amassed through a bond-buying programme during the pandemic and financial crisis. Mr Bailey has suggested the Bank will try to sell between £50bn and £100bn of bonds in the first year, starting this autumn.

The Monetary Policy Committee (MPC) has come under pressure to pick up the pace of rate rises as inflation continues to rise and other central banks push ahead with a rapid unwinding of low rates. Price increases have wrong-footed the economic establishment, with Threadneedle Street insisting inflation would be “transitory” as recently as last November.

It came as UBS warned that the pound will plunge to levels last seen in March 2020 later this year as rising US interest rates strengthen the dollar and the energy crisis engulfs Europe.

Sterling risks falling as low as $1.15 (95p), according to analysts at the investment bank, down by around 5pc from its current level of $1.22. A debate about how to tackle surging living costs has been at the heart of the Tory leadership contest between Rishi Sunak and Liz Truss.

Meanwhile, UK consumer prices rose by 9.4pc in the year to July, the highest rate of increases for 40 years.

When it last produced detailed numbers in May, the Bank suggested that inflation would peak a little over 10pc at the end of this year before dipping back into single figures in the first quarter of 2023. However, the City expects these predictions to be revised up because energy prices are now likely to be far higher than thought at the time.

The energy price cap is expected to surge from about £2,000 to £3,600 this winter because of fears that Russia will cut off gas supplies to Europe.

The Resolution Foundation, a think tank, said that double-digit inflation could feasibly persist well into next year, with a peak of 15pc at the start of 2023. It warned that it was “increasingly unlikely” that annual price rises would fall back to the Bank’s 2pc target within the coming year.

Jack Leslie, from the Resolution Foundation, said: “The outlook for inflation is highly uncertain, largely driven by unpredictable gas prices, but changes over recent months suggest the Bank of England is likely to forecast a higher and later peak for inflation.”

Markets are pricing in a roughly 90pc chance of the MPC backing a halfpoint increase in the cost of borrowing today, taking rates from 1.25pc to 1.75pc. Almost 2m homeowners will be hit with the biggest mortgage rate rise in nearly 30 years as a result.

Monthly mortgage payments for a buyer purchasing an average £270,000 property with a 25pc deposit will cost almost £200 more per month than in November last year, before the Bank began raising rates, according to analysis by Moneycomms and Totallymoney, a credit app. Rising mortgage costs threaten to pile more pressure on households experiencing the worst increase in cost pressures for decades.

Mr Leslie said: “How long this high inflation will last is hugely uncertain, but the cost of living crisis looks set to last longer and hit households harder than previously anticipated.”

‘How long this inflation will last is hugely uncertain, but the cost of living crisis looks set to last longer’