The Bank of England looks set to raise interest rates by at least half a percentage point on Thursday in a bid to tame inflation that is just off a 40-year high, against a backdrop of a tumbling currency and a free-spending government.
Economists polled by Reuters last week expect the BoE to announce at 1200 GMT that rates will rise to 2.25% from 1.75%, while financial markets have priced in a bigger move to 2.5%.
Central banks globally have been hiking rates to tackle inflation caused by the surge in energy prices following Russia's invasion of Ukraine, as well as supply-chain pressures and labour shortages since the COVID-19 pandemic. New Prime Minister Liz Truss's caps on household and business energy tariffs mean inflation is unlikely to rise as high as the 13.3% peak the BoE had pencilled in for October, or rates of more than 15% which economists expected for early 2023.
"Although the immediate risk of recession over the coming winter is diminished, substantial fiscal stimulus adds to the risk of high inflation being maintained for longer – and hence the chances of, ultimately, substantially more policy tightening by the Bank of England being required," Investec economist Sandra Horsfield said.
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