Rate rise tipped in Britain to tackle surging inflation

The United Kingdom's central bank looks set to confront fast-rising inflation by raising its base interest rate to a level unseen since the start of the novel coronavirus pandemic.

The Bank of England could make the move on Thursday, which the Financial Times said could disappoint financial markets, which had been expecting borrowing costs to continue to rise steadily throughout the year.

Silvana Tenreyro, an external member of the bank's Monetary Policy Committee that sets interest rates, told the Financial Times that the bank has to tread a careful path because any move to push inflation back down to the bank's pre-pandemic target of 2 percent too quickly could destabilize the economy.

The UK's inflation rate had reached 5.5 percent by January and is thought to have edged considerably higher since then.

"It is a huge shock that is going to have a big hit," Tenreyro said.

Paul Dales, chief UK economist at consultancy Capital Economics, told the FT that global events added fuel to the fire and pushed inflation so high that the bank had to take action. "Inflation is well above target and GDP growth is falling further out," he said.

Essentially, the bank had to decide whether it wanted to tackle inflation by raising interest rates and taking money out of circulation, or whether it wanted to stimulate growth by cutting the interest rate and making it cheaper to borrow money and therefore easier to invest in growth.

Fast-rising energy prices－and therefore inflation－triggered by the situation in Ukraine and by sanctions against Russia tipped the balance in favor of trying to stifle inflation by raising rates, economists said, with a hike of 0.25 percent now expected. The move would take the base rate from 0.5 percent to 0.75 percent.

If the rate is indeed hiked, it would be the third such move since December.

Three-decade high

Goldman Sachs has predicted UK inflation will hit 9.5 percent in October, and KPMG said it could even reach double digits this year.

Inflation in January was already at the highest level in 30 years.

With massive numbers of job vacancies in the UK and prices predicted to jump this year, workers will be well placed to push for higher wages, reported The Telegraph, which it said will only add to the inflationary pressures.

Economists are expecting the Bank of England's benchmark rate to continue to rise to 1.5 percent by late summer and to 2 percent by this time next year, reported The Guardian.

Rishi Sunak, the UK's chancellor of the exchequer, said recently that the economy faces considerable uncertainty.

Suren Thiru, head of economics at the British Chambers of Commerce, told the BBC that the impact of the situation in Ukraine "has increased the risk of a recession in the UK by exacerbating the already acute inflationary squeeze on consumers and businesses and derailing the supply of critical commodities to many sectors of the economy".