The nine-member MPC will also consider several other developments at home and abroad that could be considered reasons for a rate hike. Top of the list will be the government’s £150 billion energy subsidy scheme, which will benefit millions of people who, many argued, do not need to be cushioned by the gas price shock. Better-off households are more likely to spend the money on imported items that are in short supply, forcing retailers to raise their prices further. Higher interest rates will fuel their monthly mortgage bills and force them to cut back on their spending. At least that’s the theory. Wages are another matter of concern for the Bank’s rate-setters. In July, wage growth rose to 5.2% from 4.7% in June. Those figures may lag behind inflation and reveal the worst pressure on living standards in two generations, but they still worry the MPC, which fears higher wages will trigger higher prices in coming years when other business costs have calmed down. . Inflation graph James Smith, an economist at ING, said the £2,500 home energy price cap would prevent inflation from exceeding 11%. “However, the Bank of England is watching wage growth more closely as hawks worry that labor shortages could lead to core inflation remaining more persistently above target,” he added. Finally, there is the impact from inflationary trends in the rest of Europe and the US. The European Central Bank raised its key interest rate by a record margin last week to fight inflation, while the US central bank, the Federal Reserve, is poised to continue raising lending rates despite inflation falling from 9.1 % in June to 8.3% in August. . The dollar will rise and the pound fall if global investors can outperform New York deposit accounts. If sterling falls, the price of foreign imports will rise further, putting even more pressure on UK inflation. Arguments against tackling inflation with higher interest rates will likely fall on deaf ears. The pressure on the Bank to follow its rivals – if only to prevent the currency from falling again – will be very strong, most analysts say. Around town, the debate centers on whether Threadneedle Street will raise the key rate by 0.5% or follow the Fed and ECB with a whopping 0.75% hike. Subscribe to Business Today Get ready for the business day – we’ll point you to all the business news and analysis you need every morning Privacy Notice: Newsletters may contain information about charities, online advertising and content sponsored by external parties. For more information, see our Privacy Policy. We use Google reCaptcha to protect our website and Google’s Privacy Policy and Terms of Service apply. Giorgos Lagarias, the chief economist at Mazars accounting, is among those who argue that the looming recession and the panicked reaction of households will reduce inflation. He said that instead of increasing spending, most households would be cautious, which is already reflected in higher savings rates. “If consumers remain quite conservative with their discretionary spending and the economy slows as predicted, by the end of 2023 we could even be talking about deflation rather than inflation,” Lagarias said. If that happens, the Bank of England will be accused of taking us on a rollercoaster ride when it could have calmly weathered the storm.
