Sterling has recovered on news that the Bank of England (BoE) may hike interest rates further. The cheerful market mood has helped to support the British currency.
The pound recovery has also been boosted by new fiscal measures by the British government such as cutting wages of public sector employees or requesting from companies to decrease their profit margins to bring down persistent inflation, which could help to improve the gloomy economic outlook.
Last week, the BoE surprised markets by delivering a 50 basis points rate hike following hotter-than-expected headline inflation and higher core Consumer Price Index (CPI). The United Kingdom’s headline inflation reached to 8.7% as higher prices for recreational cultural goods and services, air travel, and second-hand cars offset the minimal decline in high food inflation and declining gas prices. The core inflation printed fresh highs at 7.1% despite the BoE’s policy-tightening measures.
More interest rates hikes
BoE policymakers expect bigger rate hikes as inflation has turned out to be more persistent than expected. BoE Governor Andrew Bailey has also confirmed that there is a long way to go till the bank achieves price stability so further interest rate hikes are not off the table.
However, there are concerns that the UK’s economic outlook is in danger after interest rates have been raised by 50 basis points (bps) to 5%. More interest rate hikes by the BoE will create further risks to the economic outlook.
Government efforts to tame inflation
To control surging inflation, Rishi Sunak’s government has promised to tackle corporate profiteering and limit public sector pay rises. In an attempt to ensure that companies are not raising prices and taking advantage of economic conditions, Chancellor of the Exchequer Jeremy Hunt will meet with industry regulators. Sunak also noted on Sunday that he may reject public sector wage increases that are too high.
Both measures demonstrate that the government is determined to support the Bank of England in its fight against stubborn inflation.
The central bank was criticised by the Conservative Party after its surprising 50 bps rate hike, as there are worries it would create more mortgage pain for ordinary British citizens when they are already struggling with the ongoing cost-of-living crisis.
The BoE had previously argued that there was no reason to worry about profiteering as it wasn’t widespread and that public sector wages had a limited impact on inflation especially when compared to pay increases in the private sector. However, more recently, after the recent rate decision, BoE Governor Andrew Bailey requested from workers to control their pay demands and asked for businesses to stop trying to raise profit margins.
With the economy struggling and inflation remaining elevated, Sunak’s government is under immense pressure to tackle the issue of inflation amid increased mortgage costs, worker shortages and weak growth. While Conservative MPs have accused the Bank of England for its failure to control inflation, Sunak told the BBC that the central bank “is doing the right thing, has my total support.”
For this week, all eyes will be on four members of the BOE’s rate-setting committee, including Bailey and chief economist Huw Pill, who will speak publicly. Market participants will look for comments regarding their latest big rate increase and whether a recession will be necessary to bring inflation down. The BoE will also publish its latest data on household interest rates, which are expected to increase.
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