The Bank of England’s Recipe for Controlling Inflation: A Dash of Hikes and a Pinch of Uncertainty

The Bank of England is set to hold its Monetary Policy Committee meeting on Thursday, with the market predicting a 0.5% increase in the Base Rate. This would bring the official bank rate to 4%, with the possibility of another rate hike in the future.

The Bank of England faces a challenging task of balancing the need to control inflation, which has been affecting the prices of goods and services, while also avoiding a downturn in the economy. Governor Andrew Bailey remains hopeful that the Bank’s current strategies will succeed in bringing inflation down, as it has slowly declined from its peak in October. However, policymakers are still cautious and may implement further measures to curb demand.

Prices of services remain high, despite the headline rate dropping to 10.5% in December from its peak of 11.1% in October. The prices of food and non-alcoholic drinks have also continued to increase, rising by 16.8% in the past year. Industry leaders have warned that these prices may take a considerable amount of time to come down.

Labour shortages and wage growth are also ongoing concerns. The tight labour market and strong wage growth in the private sector, which rose by 7.2% in the three months to November, have resulted in industrial unrest. The disparity with public sector pay, which rose only by 3.3% in the same period, has only added to these concerns. This may result in companies passing on the higher wage costs to consumers, contributing to an inflationary spiral.

Despite the expected interest rate hike, interest rates are predicted to rise to around 4.5% before the Bank of England pauses its rate hikes. This could put additional pressure on borrowers, further weaken the housing market, and potentially reverse the small rise in consumer confidence. This may mean that a recession has only been postponed, not avoided.

For homeowners with mortgages, the question of whether to fix their rates now is a difficult one. With the interest rate increase, the balance may tip towards fixing, but there is no clear answer.

In conclusion, the Bank of England faces a delicate task in controlling inflation while avoiding a downturn in the economy. The expected interest rate hike may bring additional pressure on borrowers and the housing market, but the future remains uncertain. Homeowners with mortgages will have to weigh their options and make their decisions carefully.