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Bank of England set to raise rates to 3.5% after inflation hits 41-year high
The Bank of England looks set to raise interest rates to 3.5% or more next week, but policymakers appear increasingly split on how much tightening is needed to tame double-digit inflation as the economy heads into recession.
Last month BoE Governor Andrew Bailey said further rate rises were likely to be necessary, though fewer than financial markets had priced in before that meeting, when investors were betting rates would reach 5.25% in mid-2023.
However, two policymakers who voted against November's three-quarter-point rise - the BoE's biggest rate hike in over 30 years - have warned that much more tightening would lead to an unnecessarily severe recession.
Financial markets currently price in a 78% chance that the BoE will raise rates by half a percentage point to 3.5% on Dec. 15, and a 22% chance of a rise to 3.75%.
The central bank's immediate concern is British consumer price inflation, which hit 11.1% in October, the highest reading since 1981 and more than five times the BoE's 2% target, up from 4.2% a year earlier.
While much of the increase has been driven by higher energy prices following Russia's invasion of Ukraine, the BoE fears labour shortages and other bottlenecks caused by the COVID-19 pandemic and Brexit could make inflation slow to fall.
"To our minds, another 50 basis point increase looks likely," Investec economist Philip Shaw said. "The BoE has made it pretty clear that inflation is too high. It's concerned about the tightness of the labour market. And there are big risks to its projections."
Bailey has said Britons must accept reduced living standards because of the energy price shock, but the country is in the midst of a wave of industrial action as trade unions seek to limit the impact on their members.
Shaw views November's 75 basis point rate rise as a one-off, coming after market turmoil caused by Prime Minister Liz Truss's short-lived government and new assumptions of more generous government support for household energy bills.
[Source: By David Milliken, Reuters, Yahoo News, London 07Dec22]
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