Interest rates are expected to hit 0.75% next week on fears the Bank of England could push them up to 2% by the end of the year.
Last month, the Bank forecast that consumer price inflation – a measure of rising prices – would peak at around 7.25% in April. This is when household gas and electricity bills are expected to rise by around 54% when a price cap set by Ofgem changes.
However, an eight percent inflation rate is now forecast for later this year, with rising interest rates a method that can be used to stifle it, making borrowing more expensive. The pressure on the bank has been increased by several levels due to Russia’s invasion of Ukraine.
This has pushed up some prices, notably for natural gas, which is now 60% higher than when the Bank met in February, before Russian President Vladimir Putin’s troops entered Ukraine. A quarter-point interest rate hike on Thursday – the Bank’s third since December – would bring the cost of borrowing in the UK back to where it was two years ago, before the Covid pandemic -19 does not hit.
Experts say higher interest rates won’t stop a short-term rise in inflation, and higher energy prices will compress household living standards, ultimately reducing inflation. They say the Bank needs to strike the right balance.
James Smith, research director at the Resolution Foundation think tank, said: “I think it’s really difficult for the Bank at the moment to get it right. If they go too slowly you get the shock. inflation. If they go too fast, it stifles the recovery. And then there’s a risk of recession on top of that.”
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