- Higher-than-expected inflation data this week could mean the Bank of England could hike rates.
- Jeremy Hunt, head of the UK Treasury, said he was ready to raise interest rates further, even at the risk of sending the UK into a recession, if it means reducing inflation.
- Over the past 18 months, the Bank of England has aggressively raised interest rates to 4.5%, the highest in 15 years.
The UK Treasury chief said he would be prepared to see the UK economy slide back into recession if more interest rate hikes were needed to bring down inflation.
With the Bank of England expected to continue raising rates this week following higher-than-expected inflation data, Jeremy Hunt said measures needed to be prioritized to slow the pace of price hikes.
In an interview with Sky News aired on Friday, Hunt said that “the only path to sustainable growth” is to bring inflation under control.
Asked if he was comfortable with further rate hikes even though they might precipitate a recession, Hunt replied: “Yes, because ultimately inflation is a source of instability. … It’s not a trade-off between addressing the inflation and the recession.”
Like other central banks, the Bank of England has raised interest rates aggressively over the past 18 months or so to a 15-year high of 4.5% after inflation rose sharply, first due to necks of bottles caused by the coronavirus pandemic and then by Russia’s invasion of Ukraine, which caused a spike in energy and food prices.
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Higher borrowing costs aim to make borrowing more expensive for individuals and businesses, which reduces demand in the economy.
“If we want to have prosperity, grow the economy, reduce the risk of recession, we must support the Bank of England in the difficult decisions it makes,” Hunt said.
There had been hopes that the bank, whose main job is to keep inflation around 2%, might hold off on rate hikes, but this week’s inflation data sounded the alarm that it will have to continue tighten monetary policy.
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The consumer price index fell to 8.7% in the year to April from 10.1% in March, largely because last year’s energy spike in the wake of the invasion of Ukraine fell off annual comparison.
The decline has not been as large as expected, mainly because prices in the wholesale gas market have been falling for months.
Since then, financial markets have priced in further rate hikes by the central bank in the coming months, perhaps as high as 5.5%, bad news for borrowers and those looking to get a new mortgage.
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“This week’s inflation shock print has very quickly reset most forecasters’ expectations of where the Bank of England rate will peak,” said Luke Hickmore, director of investments at the asset management firm. abrdn.
Earlier this week, the International Monetary Fund predicted that the UK economy will avoid slipping into a recession this year. However, its updated growth forecasts were released ahead of the inflation data, which led to the increase in projected interest rates.