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Bank of England is about to break the precedent on interest rates? | Bank of England

TThe US Federal Reserve did just that. The European Central Bank has done it. Now the bank of England must decide whether follow suit and choose for more than usually rise in official borrowing costs when they meet on Thursday.

After edging bets up on quarter- dot at a time, financial markets are betting that monetary policy committee (MPC) will announce 0.5 percentage points jump this time something that has never happened since the bank gained independence in 1997.

The last time interest rates were raised this much, John Major was prime ministerKen Clark was the chancellor and Eddie George was the bank. of Governor of England. It was back in 1995, when the Treasury still had final to tell over interest rates.

If the bank broke new post-independent land, it won’t just because annual inflation rate is in 40-year high of 9.4% and expected rise farther over months ahead. And it won’t just be a question of playing catch-up after repeated underestimation price pressure, although that’s a factor. At that time last yearMPC predicted that inflation would peak in end of 2021 at just four%.

Quicker, jump will be because the bank is afraid of inflation becomes embedded in in economy outweighs the fear that economy is about to enter a recession or indeed May already to be in one. David Blanchflower, former The MPC member said he thought the UK in early stages of recession that began a few months ago.

Chart showing interest rates since January 2021

What makes a committee work more difficult in that economy gives off mixed signals, as is often the case with key turning point. Unemployment back to low levels last visible in 1970s and there record vacancies.

Some companies, such as the Aldi supermarket chain, have raised wages. for their employees twice in in past year in trying to keep on staff.

Others, including builder Taylor Wimpey, bank HSBC and energy company Shell announced one-off payments help employees through cost of life crisis.

tightness of work market touches the bank as it conjures up up memories of The 1970s, when prices and wages were chasing each other higher until inflation reaches post-second world the peak of the war of 25%.

Professor Stephen Millard, of National Institute of Economic research, approves interest rates need go up from 1.25% to about 3% if inflation is to be brought up back on track but he thinks to speak of the 1970s-style salary spiral went too far.

Chart showing inflation since January 2021.

The median payroll was 4% on average in three months until June and even with bonuses and one-off payments on top, Millard is just waiting earnings growth of 6% is year – Well below inflation rate. Wage growth high by recent standards, he says, but not high enough to create an inflationary spiral.

Banks decision will also depends on what he thinks happens to core inflation as measured by consumer prices, excluding fuel, food, tobacco and alcohol. Here the trend was encouraging, with lower core inflation for two months in row from 6.2% in April up to 5.8% in June.

From more anxiety will cause a steady rise in service inflation, up from 0.7% in June 2021 up to 5.2% in June. This will be considered as sign of price generated pressure in domestic economy and not imported from abroad.

Chris Williamson, Chief business Economist at the S&P Global Market Intelligence rating agency, says polls of manufacturing and service enterprises show in economy moving for recession and what the debate is about how it will be long and deep. He says bank should keep in mind that a 0.5% increase in interest rates and signal what base rate approaching 3% economy into an even deeper recession.

Williamson concerned so much of indicators showing economy good work can change quickly should interest rates rise fast. He warns about this “whip effect” may mean that business closures that had remained low during the pandemic have become widespread, and unemployment, which has steadily declined over in past year up to 48-year short, begins to rise.

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Housing market that has proven its resilience from the very beginning of pandemic, maybe also begin weaken and prices may begin fall, causing some households to have negative equity.

Tim Bannister of in online real-property portal right says firstbuyers facing average monthly mortgage payment 20% higher than on start of per year due rising interest rates and asking prices. Meanwhile, existing homeowners, many of they are nearing the end of a fixed-rate mortgage, must pay higher monthly bills.

“With every jump in interest rates, homeowners contribute approximately 1% extra of their gross salary on average for mortgages, and an increase of 0.5% in base rate increase average monthly mortgage payments by up to 40% of your salary,” he said. says.

Other sign of the impending recession may be found in warehouses of retailers, manufacturers and construction companies. For many of in past yearenterprises have accumulated raw materials materials and goods that in a lack of guarantee they can fulfill contracts and supply customers.

However, data from the US show collapse in consumer demand It has left companies with the mountains of unsold clothing, household goods and furniture. Stocks were high before support sales a few months ago. Warehouses are full now with things that should be unloaded at a discount, with few potential buyers.

Williamson says in problems facing Walmart and Costco in USA will also apply to large retailers in UK and throughout Europe.

Krishna Guha, from investment bank consulting firm Evercore expects the Bank “join in global trend for big rate hiking” with a half- an increase in the score to 1.75%, although with some reluctance due to pronounced deceleration in in economy.

Like most other analysts, Guha will look for for hints where to with United Kingdom on edge of stagflation – the bank goes out next.

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Adrian Ovalle
Adrian Ovalle
Adrian is working as the Editor at World Weekly News. He tries to provide our readers with the fastest news from all around the world before anywhere else.

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