Bank of England to admit that high inflation will last far longer than hoped

·5-min read
Bank of England
Bank of England

The Bank of England will on Thursday be forced to admit that inflation will remain high for far longer than previously predicted as it increases interest rates for the sixth time in a row.

Andrew Bailey, the Governor, is expected to unveil forecasts showing inflation will still be significantly above 10pc in 2023 as Britain battles soaring energy bills sparked by the war in Ukraine.

Markets are betting that the Bank will raise interest rates by 0.5 percentage points in an effort to combat surging prices, its biggest increase in 27 years.

Policymakers will also announce plans to start selling the £850bn mountain of government debt amassed through a bond-buying programme during the pandemic and financial crisis.

Mr Bailey has suggested the Bank will try to sell between £50bn and £100bn of bonds in the first year, starting this Autumn.

The Monetary Policy Committee (MPC) has come under mounting pressure to pick up the pace of rate rises as inflation continues to rise and other central banks push ahead with a rapid unwinding of low rates.

Price increases have wrongfooted the economic establishment, with Threadneedle Street insisting inflation would be "transitory" as recently as last November.

It came as UBS warned that the pound will plunge to levels last seen in March 2020 later this year as rising US interest rates strengthen the dollar and the energy crisis rips through Europe.

Sterling risks falling as low as $1.15, according to analysts at the investment bank, down by around 5pc from its current level of $1.22.

A debate over how to tackle surging living costs has been at the heart of the Tory leadership contest. Rishi Sunak will seize on Thursday's inflation warnings to suggest that now is not the time for tax cuts of the scale proposed by his rival Liz Truss, because putting more money in workers' pockets would only drive prices even higher.

Mr Sunak said: "If we rush through premature tax cuts before we have gripped inflation all we are doing is giving with one hand and then taking away with the other,"

Ms Truss responded that Britain could not "tax its way to growth". She said modest tax cuts, "including scrapping a potentially ruinous corporation tax rise that hasn't even come into force", and slashing red tape would not push up the price of UK goods and services.

She has also vowed to review the way the Bank sets policy to "make sure it is tough enough on inflation".

UK consumer prices rose by 9.4pc in the year to June, the highest rate of increases for 40 years. When it last produced detailed numbers in May, the Bank suggested that inflation would peak a little over 10pc at the end of this year before dipping back into single figures in the first quarter of 2023.

However, the City expects these predictions to be revised up because energy prices are now likely to be far higher than thought at the time. The energy price cap is expected to surge from about £2,000 to more than £3,600 this winter because of fears that Russia will cut off gas supplies to Europe.

The Resolution Foundation, a think tank, said that double-digit inflation could now feasibly persist well into 2023, with a peak of 15pc at the start of 2023.

It warned that it was “increasingly unlikely” that annual price rises would fall back to the Bank's 2pc target within the coming year.

Jack Leslie from the Resolution Foundation said: “The outlook for inflation is highly uncertain, largely driven by unpredictable gas prices, but changes over recent months suggest that the Bank of England is likely to forecast a higher and later peak for inflation.”

Markets are pricing in a roughly 90pc chance of the MPC backing a half-point increase in the cost of borrowing today, taking rates from 1.25pc to 1.75pc.

Almost two million homeowners will be immediately hit with the biggest mortgage rate rise in nearly 30 years as a result.

Monthly mortgage payments for a buyer purchasing an average £270,000 property with a 25pc deposit will cost almost £200 more per month than in November last year, before the Bank began raising rates, according to analysis by Moneycomms and TotallyMoney, a credit app.

Rising mortgage costs threaten to pile more pressure on households, which are already experiencing the worst increase in cost pressures for decades.

Mr Leslie said: “With gas prices continuing to reach record levels, both households and businesses will see large increases in their energy bills throughout the winter and into 2023.

“How long this high inflation will last is hugely uncertain, but the cost of living crisis looks set to last longer and hit households harder than previously anticipated.”

The Resolution Foundation noted prices for several key commodities including oil and lumber had “fallen substantially” over recent months, but said gas price increases were “wiping out any good news”.

Expectations for gas prices this winter are about 50pc higher than they were before the Russian invasion of Ukraine.

The Bank's sale of government debt will start the process of actively unwinding a quantitative easing (QE) programme that began in 2009 and peaked at £895bn.

If it simply allowed the gilts to mature, the Bank would continue to hold UK government debt until 2071.

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