That gives the nine-member Monetary Policy Committee a tougher job than perhaps at any time since Gordon Brown made the bank independent of government in 1997. Interest rates are almost certain to rise from their current level of 1.25%, marking the sixth consecutive increase from a record low of 0.1% during the pandemic. This will mean higher borrowing costs for property owners on tracker mortgages. Lenders may also be more willing to raise the interest rates they charge for unsecured lending, such as personal and business loans. The big question for the MPC is how much it will raise rates, with most analysts expecting a 0.25 percentage point increase or 0.5. A 0.5 percent increase would be the largest in 27 years and could drag the economy deeper into recession. But failure to reduce inflation would also create problems. Consumer price inflation – the rate at which prices rise – is running at an annual rate of 9.4 percent, and fears are growing that it could consolidate if it does not come down soon. If firms and workers expect prices to rise sharply, they are more likely to raise their own prices and wage demands in response. A bigger increase would bring the UK more closely in line with other economies such as the US, where central bankers have raised interest rates aggressively this year. However, there are signs that inflation may be starting to ease. A closely watched survey of purchasing managers, seen as a good early indicator, showed that manufacturers raised their prices at the slowest rate of increase since May last year. Manufacturers’ input costs rose at the slowest pace since January 2021, thanks to falling commodity prices. Orders and production at UK factories also fell. A weakening global economy means demand for commodities is likely to fall further, with prices following suit. China reported that its factory output unexpectedly fell in July. If the decline continues, it will likely lead to further declines in global commodity prices because China consumes more raw materials than any other country. Despite signs of an economic slowdown, the Bank of England will continue to raise interest rates, at least in the short term. “The MPC should be encouraged by cooling inflationary pressures,” said Martin Beck, chief economic adviser at EY Item Club. “But it is unlikely to have any bearing on their thinking for this week’s meeting, where a rate hike of at least 25 bps is certain and a 50 bps hike a live possibility. “With demand weakening both at home and abroad, the EY Item Club expects producer price inflation to continue to moderate in the remainder of 2022, which will mean that the need to continue monetary tightening will diminish policy”. He added: “Unless the MPC signals a move towards a much more hawkish approach on Thursday, we see Bank Rate reaching 2% by the end of 2022, rather than the much higher level that the market is currently pricing in.” Susannah Streeter, senior analyst at Hargreaves Lansdown, also expects interest rates to rise: “BoE governor Andrew Bailey has stressed the huge importance of bringing inflation down to the 2% target, saying there will be no ifs, no buts they prevented “It’s far from comfortable, but an economy losing steam is seen as the price to pay to stop an inflationary spiral in its tracks. The additional difficulty facing policymakers is that much of the inflation is imported and driven by external shocks rather than domestic forces, which will make it much more difficult to push down the price spiral.” This week marks 15 years since the first shocks of the global financial crisis ushered in a new era of ultra-low interest rates that, it was hoped, would boost economic growth. The result was a historically poor period of wage stagnation. It proves a simple fact: lowering or raising interest rates is a blunt instrument that cannot “fix” a nation’s economy. At best, it may have a limited impact on increasing or decreasing the overall level of demand, but that’s about it. The MPC will offer what it believes is the best way to moderate inflation, but it cannot fix the cost of living crisis. It is up to the Government, not the Bank of England, to deliver what it has failed to do for 15 years: deliver financial stability and growing prosperity for ordinary people.
