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Bank of England set to hike interest rates to 13-year high amid cost crunch

·2-min read

Interest rates are expected to be hiked once again on Thursday to their highest level for 13 years as the Bank of England battles to cool rocketing inflation.

The Bank’s policymakers are predicted to increase rates from 0.75% to 1% – a level not seen since early 2009 – and ramp up its forecasts for inflation as the Ukraine war compounds a crippling cost-of-living crisis.

Members of the Monetary Policy Committee (MPC) have already raised rates at each of its past three meetings to try to rein in inflation, which hit a 30-year high of 7% in March.

The cost crunch is expected to tighten its grip later this year when the energy price cap is revised once again, with warnings inflation could peak at 9% or even double digits in the autumn.

As households and businesses tighten their belts in the face of the cost pressures, UK growth is set to suffer and the Bank is likely to trim its outlook for the economy as well on Thursday, according to experts.

Investec economists said: “The UK is in the grip of the cost-of-living crisis.

“Coupled with tax rises, this leaves a rocky road ahead.”

They expect that a recession will be avoided, thanks in large part to the savings built up by households in the pandemic, but said slowing growth and soaring inflation “leaves the MPC in a bind”.

Investec is pencilling in another rate hike in August to 1.25%.

But it sees the Bank pausing after this “to assess how big the effect of the real income squeeze on activity turns out”, before pushing through two more rate rises in 2023.

Growth already began to pull back sharply in February as the cost-of-living squeeze took hold, with official data showing expansion of just 0.1% down from 0.8% in January.

The Bank said last month it believed growth would stand at about 0.75% in the first quarter, up from a previous expectation for gross domestic product (GDP) to remain flat, with the jobs market also holding up well.

But many experts see GDP flatlining in the second quarter as consumer confidence falters in the face of surging price pressures.

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