Yahoo Finance Bank of England set to raise interest rates for third time since pandemic
The Bank of England (BoE) is set to hike UK interest rates for a third time in a row on Thursday as it battles rising inflation and a tight jobs market.
Economists expect Threadneedle Street to lift rates by 25 basis points to 0.75% even as the Ukraine crisis darkens the global economic outlook.
This will be the third consecutive rate hike since December, and the third since the start of the coronavirus pandemic. Another 0.25 percentage point rise is also forecast in May, taking rates to 1%.
The Monetary Policy Committee (MPC) first increased rates from record lows of 0.1% to 0.25% in December, making the BoE the first major central bank to take the plunge.
In February it then doubled the rate from 0.25% to 0.5%, the second increase since the start of the pandemic, and the first back-to-back hike since 2004.
At the time, four dissenting MPC members voted for a 50 basis point rise to 0.75%, arguing that monetary policy should tighten faster, to “reduce the risk that recent trends in pay growth and inflation expectations became more firmly embedded” and to help bring inflation down to target.
Read more: How will the Bank of England react to the UK's inflation-wage dilemma?
It comes as UK inflation hit a fresh 30-year high of 5.5% in the year to January. The consumer prices index reading from the Office for National Statistics (ONS) last month was the highest since March 1992, when it stood at 7.1%, climbing further above the Bank of England’s (BoE) 2% target.
In addition to this, ONS data on Tuesday revealed that UK workers have suffered their biggest pay squeeze in eight years.
The unemployment rate fell to 3.9% in the three months to January, dropping below the 4% rate from February 2020, before the COVID pandemic hit the UK.
Payroll numbers climbed 275,000 in a month to reach 29.7 million in February, and vacancies struck a new high of 1.3 million. However, while vacancies and payroll numbers have hit record highs, real regular pay slumped by 1%, the biggest fall since 2014.
“The further fall in the unemployment rate to within a whisker of the pre-pandemic rate will only encourage the Bank of England to raise interest rates on Thursday, probably from 0.50% to 0.75%, despite the coming extra hit to households’ real incomes from the war in Ukraine,” Paul Dales from Capital Economics, said.
“What’s more, we think a low unemployment rate and high wage growth will prompt the Bank to raise rates to 2.00% next year.”
Watch: Will interest rates stay low forever?
This was echoed by Martin Beck, chief economic advisor to the EY ITEM Club. He said: “The Monetary Policy Committee's worry will be that a tight jobs market risks inflationary second-round effects, as workers seek to offset cost of living pressures by asking for higher wages.
“This means it's now even likelier that the committee will raise interest rates on Thursday. But the extent to which strong demand for workers is feeding into pay growth is still not clear.”
The central bank warned earlier this month that consumer price inflation could peak at about 7.25% by April when a 54% surge in energy bills is due to take effect, and the chancellor’s tax rises come into place. But the BoE has so-far underestimated the extent of inflation in previous forecasts.
UK inflation is still being dominated by energy prices, which has been exacerbated by the Ukraine conflict, and the prices of a select number of goods, which were heavily affected by the pandemic.
Read more: What higher inflation means for savers and investors
Paul Craig, portfolio manager at Quilter Investors cautioned: “It is important to remember that employment is a ‘lagging’ economic indicator and we could well see it slow over the coming months — particularly given the current circumstances.
“While unemployment has returned to pre-pandemic lows for now, there is some talk of potential shutdowns caused by the supply chain impact of Russia’s attack on Ukraine which may hinder this progress.”
Meanwhile, Derrick Dunne, chief executive of YOU Asset Management, said: “The labour shortage is in danger of becoming a bigger issue that feeds further inflation. Record high vacancies are a big dilemma for the BoE and another cloud in the broader cost-of-living crisis. Wage growth still lags inflation and people are moving jobs at record levels in search of better pay packets as a result.
“Such a tight labour market and pressure from workers will keep pushing employers to increase salaries. The BoE will be very conscious that this may have the effect of entrenching inflation more deeply into the economic landscape, by ensuring a vicious cycle of more wage growth and inflation.
He added: "It’s a many-sided challenge that the Bank’s Monetary Policy Committee will be keen to tackle sooner rather than later, and today’s employment data will be front of mind when they meet this week to vote on interest rates."
