Bigger UK interest rate hike "on the table" says bank boss
Interest Rate

Bigger UK interest rate hike “on the table” says bank boss

Andrew Bailey, the governor of the Bank of England, is making headlines with a suggestion that a 0.5% interest rate rise is “on the table”. The next Monetary Policy Committee (MPC) meeting and interest rate decision is due on 4th August, with markets now primed for a ditching of the 0.25% step approach. In a speech in the City, Bailey was adamant that inflation would be the main focus of monetary policy in the short to medium-term.

Inflation hits 9.4%

Bailey announced this more hawkish approach to inflation on the eve of the publishing of June’s inflation figure, which came in at 9.4%, the highest in 40 years. While the Bank of England predicts inflation could hit 11%, many analysts believe it could go even higher. Food inflation is already in double digits, placing massive pressure on household budgets ahead of an expected economic downturn. It is difficult to predict how high inflation could go as the worst of the energy crisis is still to come.

Related article:   Inflation “could hit 15% this winter”
UK interest rate

Reversal of quantitative easing

In the aftermath of the 2008 global financial crisis, the Bank of England introduced quantitative easing, a means of increasing cash liquidity in the marketplace via bond purchases. In total, the Bank of England acquired a staggering £875 billion worth of bonds. Bailey announced that the Bank would be looking to sell these bonds from September onwards. Initially, up to £100 billion worth of gilts could be sold in the first 12 months, the start of a significant bond sale.

This would tighten the amount of money circulating in the economy and further reinforce the impact of higher interest rates. While this is certainly a more aggressive approach than expected, the Bank seems determined to bring inflation back towards its 2% target.

Related article:   Bank shocks with full percentage point hike

Should we expect a 0.5% base rate rise in August?

Historically, the Bank of England has used the media and City speeches to indicate policy adjustments and prime markets for interest rate changes. Unfortunately, over the last few years, we have seen several red herrings with policy U-turns leaving markets in limbo and impacting the Bank’s reputation. However, Bailey spoke strongly in his most recent speech, saying: “Let me be quite clear: there are no ifs or buts in our commitment to the 2% inflation target. That’s our job, and that’s what we will do.”

Related article:   UK rates tipped to hit 4% in light of record low unemployment
UK interest rate

It would appear that yet another sea change in policy is on the horizon, possibly prompted by the far more aggressive approach taken by the US Federal Reserve. While markets are primed for a 0.5% increase in interest rates, this is no certainty. Injecting a degree of uncertainty into the “new policy”, Bailey also said: “A half-point increase was not locked in, and anyone who predicts that is doing so based on their own view.”

Time will tell

Historically, the Bank of England and the money markets have worked hand-in-hand to gently introduce the concept of changing monetary policy. Recently, this trust has been weakened due to various U-turns and red herrings. So while a half-point rise in interest rates seems feasible next month, time will tell.