The Bank of England is expected to raise interest rates beyond the current level of 4% due to the unexpected jump in UK inflation in February. Despite most analysts forecasting a fall to 9.9%, inflation rose to 10.1%, primarily driven by a surge in food prices and non-alcoholic beverages, the highest rate in 45 years. This sudden increase in inflation has put pressure on the Bank of England to raise interest rates again during its meeting on Thursday.
The Bank's officials will also monitor wage growth, which, despite remaining high, is slowing down. The latest labor market data shows a continued tightness. The Bank's primary focus is bringing down stubbornly high inflation, which has fallen for the past three months, coming down from a peak of 11.1% in October.
However, the Bank of England is also concerned about ensuring financial stability amid growing fears over the unfolding confidence crisis in the global banking system. Following the collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank in the US earlier this month, and the weekend rescue of the institutionally critical Swiss bank, Credit Suisse, the Bank of England needs to balance its efforts to combat inflation with ensuring financial stability.
It is expected that the Bank of England will announce a 25bps rate hike during Thursday's meeting, taking rates to 4.25%. The Bank may also signal a pause in its hiking cycle moving forward. This signal of stepping back from interest rate hikes would be welcomed by investors, who are concerned that overtightening now, when monetary policy time lags are notoriously long, could steer the economy into a recession.
The Bank of England is in a challenging position of having to hike rates to bring down inflation while attempting to combat fears of systemic risk and instability that have been rippling through global markets in recent days following the banking crises in the US. However, it will be soaring prices that will be front and center in their decision-making process.
