Bank of England to launch brisk rate hike cycle to tame 40-year high inflation

The Bank of England will have to launch a cycle of steeper and quicker rate hikes to tame the steepest rise in living costs in four decades, according to City economists.

The case for front-loading rate rises is strengthening after new figures published this morning by the Office for National Statistics (ONS) revealed inflation climbed to nine per cent last month, the steepest rate since 1982 and around four and a half times the Bank’s two per cent target.

Historically high price rises up “the ante even further for the Bank of England to respond,” Sandra Horsfield, an economist at fund manager Investec, warned, adding taking the extremely tight UK jobs market into account, “the case for frontloading monetary tightening looks stronger by the day”.

Bank of America analysts are pencilling in “four more consecutive 25 basis point rate hikes by the BoE with a high risk rate setters choose to hike 50 basis points in August”.

The cost of living crunch is unlikely to ease over the course of the year, resulting in the sharpest fall in spending power since the 1950s.

Households are expected to cut spending in response to their living standards falling, likely tipping the UK into a recession, economists are predicting.

Soaring international energy prices caused by a resurgence in demand after the Covid-19 unlocking and Russia’s invasion of Ukraine have propelled inflation in the UK.

Gas and electricity prices accounted for around a fifth of overall inflation in the UK last month due to the 54 per cent upgrade to the energy price cap taking effect in April, according to calculations by Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

Inflation jumped two percentage points in April, from seven per cent, the steepest rise since 1980 and underscoring the severity of the energy price crunch.

“Today’s inflation numbers are driven by the energy price cap rise in April, which in turn is driven by higher global energy prices,” chancellor Rishi Sunak said.

The Treasury is reportedly mulling bringing forward a planned 2024 income tax cut and launching another package of support in July to tackle the cost of living crunch.

“Of course, as the situation evolves our response will evolve. I have always been clear, we stand ready to do more,” Sunak will say in a speech at the Confederation of British Industry’s annual dinner later today.

Bank governor Andrew Bailey said earlier this week rate setters would be unable to prevent inflation topping 10 per cent later this year due to around 80 per cent of the present rise in living costs being driven by higher energy prices.

However, former Bank chief Mervyn King criticised that assessment, telling LBC yesterday that leaving rates at one per cent while inflation is running at historically high levels is “really very strange”.

He supported a steeper and quicker series of policy adjustments and said the Bank had pumped too much money into the economy through bond buying during the pandemic.

Today’s ONS print also indicated domestic inflationary pressures are to blame for swelling living costs.

Core inflation jumped to a 30-year high of 6.2 per cent, driven by services firms lifting prices to offset wage pressures and the VAT rate returning to 20 per cent.

“Some of these moves are due to global factors, but there are clearly domestic drivers too,” Paul Dales, chief UK economist at Capital Economics, said.

Monetary policy is more effective at cooling inflation that is driven by home-grown pressures. Higher rates drive down domestic consumption by making it more attractive to save and more expensive to borrow.

Dales added that the Bank will send borrowing costs to a peak of three per cent.