Rising inflation is ringing alarm bells at the Bank of England: Now there are second official hints that higher borrowing costs are on the way
Households and businesses are facing higher borrowing costs as a result of a dramatic change of tone at the Bank of England as it struggles to contain rising prices.
Central bank official Michael Saunders, who sits on the monetary policy committee (MPC) that sets interest rates, said inflation could reach 4 percent later this year.
He warned that action may be needed next month to cut the cost of living and bring inflation back to the 2 percent target.
Rising prices: Bank of England has warned households and businesses of higher borrowing costs as it struggles to keep inflation under control
The comments came less than 24 hours after the Bank’s deputy governor, Sir Dave Ramsden, also said the emergency aid could be withdrawn earlier than previously thought as inflation moves towards 4 percent.
The double warnings mark a significant shift in Threadneedle Street, where until now officials had expected inflation to peak around 3 percent before falling back to target.
But in a sign that there is a debate raging at the central bank over what to do, Governor Andrew Bailey insisted it would first “assess” inflation data for things that could be “transient” before taking action.
Central bank official Michael Saunders said inflation could hit 4 percent later this year
Saunders and Ramsden’s more aggressive stance follows Wednesday’s official data showing inflation reached 2.5 percent in June, its highest level in nearly three years.
This was followed yesterday by another report from the Office for National Statistics showing that wages increased by 7.3 percent in the year to May – the biggest increase since registration began in 2000.
With pressure on the Bank to act mounting, experts said it could end quantitative easing (QE) as early as next month rather than December and follow it up next year with a rate hike.
At last month’s Monetary Policy Committee meeting, both Ramsden and Saunders voted against a rate hike and changes to the Bank’s bond-buying program.
But Kallum Pickering, an economist at Berenberg, said rates could rise before August 2022 — well above the city’s expectations that such a move won’t happen until 2023.
An end to QE and higher interest rates would drive up the cost of loans for homes, businesses and the government, which is struggling with a towering £2 trillion mountain of debt.
In a warning shot to borrowers, Saunders said, “It may become appropriate fairly quickly to withdraw some of the current monetary stimulus to bring inflation back to the 2 percent target on a sustainable basis.”
The Bank of England cut interest rates to an all-time low of 0.1 percent as the pandemic hit and drove Britain into its deepest recession since the Great Prince of 1709
The comments echoed Ramsden’s earlier warning, who said, “I wouldn’t be surprised if inflation could rise as high as 4 percent for some time later this year.”
The Bank cut interest rates to an all-time low of 0.1 percent as the pandemic hit, threatening Britain into its deepest recession since the Great Frost of 1709.
It also relaunched QE and said it would buy government debt until the total amount of assets bought under the program reached £895 billion in December.
Panmure Gordon economist Simon French said: “Saunders and Ramsden’s comments indicate a dramatic shift in the MPC.
“In the expectation that the Bank would continue to buy government debt until the end of the year, that policy is now questionable.”