Verdict: Bank of England to keep hiking rates to chase historic inflation spike

The Bank of England will keep hiking interest rates this year in a bid to chase down the highest inflation crunch since the early 1980s.

That’s according to City economists, business groups and think tanks who took today’s decision to lift borrowing costs to their highest level since 2009 as a sign of things to come.

“We don’t expect this to be the last rate rise of this cycle,”  Thomas Pugh, economist at RSM, said.

Financial markets are pricing in interest rates to hit 2.5 per cent by the middle of next year, which would mark the quickest tightening cycle since 1989.

The monetary policy committee today voted to lift rates 25 basis points to one per cent, marking the fourth meeting in a row they have lifted borrowing costs, the first such occasion since the Bank was given independence 25 years ago.

Strong upward wage pressure caused by firms scrambling to recruit staff amid a tight jobs market will determine “the degree of monetary tightening over the rest of this year,” Pugh added.

Threadneedle Street yesterday today worker shortages persisting is the greatest risk to inflation becoming entrenched in for years to come.

The Bank upgraded its forecasts for inflation to peak at just over 10 per cent in October, five times its target.

Others said the Bank should have gone further and faster.

Julian Jessop, economics fellow at the free-market think tank the Institute for Economic Affairs, said rate setters had done “the bare minimum,” adding “it is not enough” to tame the inflation spike.

“Macroeconomic policy is now in an even bigger mess. Fiscal policy is too tight and monetary policy is too loose, increasing the risks of stagflation,” he added.

Jessop has argued the Bank should have lifted rates 50 basis points. Three members of the monetary policy committee agreed with his assessment, but six voted in favour of a 25 basis point rise.

Kitty Ussher, chief economist at the Institute of Directors, said governor Andrew Bailey and co’s move to “tackle high expectations of inflation” would be beneficial for the economy in the long-run.

However, others pointed to greater dovishness in the Bank’s forward guidance as a sign markets are getting too carried away with their bets on the trajectory of borrowing costs.

“The rhetoric here isn’t strong enough to support markets’ view that Bank Rate will rise to 2.5 per cent early next year,” Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said.