The United Kingdom may be facing its highest interest rate in decades in the coming months.
- The Bank of England (BOE) may hike interest rates again in November for the eighth time in 2022.
- The potential hike is a response to the government’s controversial fiscal stimulus plans.
- “Investors are pricing in a hike of at least one percentage point next month—the biggest rise since 1989—and see the benchmark rate approaching 6% by May, from the current 2.25%,” says Bloomberg.
- BOE chief economist Huw Pill says that Prime Minister Liz Truss’s plans will likely give the economy a boost but that it can’t promise that it is too early to say whether more hikes will be necessary.
- “The remarks are the latest to underscore the likelihood that borrowing costs will keep rising as the U.K. struggles to contain inflation, which is near its highest level in 40 years and set to climb back into double digits,” says Bloomberg.
Why it’s news
As we previously reported, Truss’s government has faced global criticism due to her plan to stay the course, to grow the economy through tax cuts and incentives.
The announcements caused a week of economic turmoil, triggering several economic crises and a crisis of confidence in her government. The Bank of England raised interest rates, the pound crashed, and bond prices crashed, forcing the bank to step in and calm the panic by printing $70 billion to buy them.
“The Monetary Policy Committee is scheduled to give its next interest rate decision on November 3, days after Chancellor Kwasi Kwarteng delivers his medium-fiscal term fiscal strategy. The Treasury event was brought forward more than three weeks after his £43 billion ($48 billion) package of unfunded tax cuts triggered market panic,” says Bloomberg.
“The announcement may potentially reduce the inflationary impact, with Kwarteng under pressure to cut spending or reverse some of his tax reductions to calm investors worried that the government risks losing control over the public finances.”
It is unclear if the prime minister’s stimulus will have the effect she desires but the BOE will still be forced to make decisions to reduce the ongoing 8.6% inflation rate. The country is anticipating an 11% to 13% inflation rate in October, and some estimates suggest the country could be facing 22.4% inflation in 2023.