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  • Writer's pictureHank Klint

Bank Of England lift interest rates to 23 year high.

According to market speculations, the Bank of England (BoE) is on track to increase interest rates to their highest level in more than 23 years in an attempt to rein in persistent inflation. City traders have heightened their bets on peak UK interest rates following the release of data from the Office for National Statistics (ONS), indicating that inflation continues to plague the economy.

Market participants now anticipate that Bank Governor Andrew Bailey and the Monetary Policy Committee (MPC), comprising nine members responsible for setting official UK borrowing costs, will raise rates to at least six percent. If realized, this would mark the highest level since February 2000 and signify a substantial shift in monetary policy since the financial crisis. Interest rates had remained close to zero percent for over a decade until December 2021.

In May, prices surged by 8.7 percent compared to the previous year, matching the rate of increase seen in April and surpassing the expectations of a decrease to 8.4 percent held by financial experts in the City.

These figures indicate that domestic factors are now exerting control over UK inflation. The initial surge in prices was triggered by a sudden increase in global spending following the easing of Covid-19 lockdown measures, which collided with strained supply chains. Furthermore, Russia's invasion of Ukraine amplified inflation by disrupting international energy markets.

The MPC officials are scheduled to announce their next interest rate decision at midday tomorrow. Prior to today's inflation data, they were expected to raise rates by 25 basis points to 4.75 percent, which would mark the 13th consecutive rate increase.

However, mounting evidence suggesting that underlying inflationary pressures are resilient against previous rate hikes has increased the likelihood of a more significant 50 basis point increase by Governor Bailey and his colleagues. Analysts at Japanese investment bank Nomura commented that today's unexpected inflation data "raises the risk" of a steeper rate hike but still believe a smaller increase is more probable.

Charles White Thomson, Chief Executive at Saxo UK, stated, "There is a strong argument for a 50-basis point hike at tomorrow's Bank of England's meeting. The Bank needs to take decisive action swiftly. The risk of further policy failure is real, and the stakes are becoming increasingly high."

Market indicators currently suggest a 40 percent probability of a 50-basis point rise, up from around 20 percent before the release of this morning's data.

Economists are concerned that the BoE's aggressive tightening of the economy may lead to a recession. On the other hand, some argue that soaring prices are stifling economic growth.

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