Interest rates

Central banks ready to raise interest rates even as economies falter

(PA wire)

TWO of the most powerful powerhouses banks in the world are about to put in place interest rate this week as they battle runaway inflation – but there are warnings that could just cause further turbulence in the battered economies. Ukraine war.

With Chancellor Rishi Sunak under pressure to help families on the verge of being wiped out by the outbreak energy pricethe Bank of England and the US Federal Reserve seem certain to raise borrowing costs.

On Wednesday, the Fed is expected to raise rates by 0.25 points, its first hike since the start of the pandemic.

On Thursday, the Bank could raise its rates by 0.5 points at once, bringing the base rate to 1%. While the figure is still low by historical standards, it represents a sudden jump that could confuse companies looking to borrow or invest.

Markets believe rates will hit 2.25% in the UK and 2.5% in the US by next year.

Some economists say these rate hikes will be futile in the fight against inflation, as it is largely caused by world events and the chaos in energy markets.

Stagflation – rising inflation and falling economic growth – looks increasingly likely.

Capital Economics said: “We think the Monetary Policy Committee is sufficiently concerned that rising inflation is fueling price and wage expectations to raise the discount rate…the big question is how know how the war in Ukraine and its economic consequences influence the speed and extent of interest rate increases?”

There could be tensions on the MPC over this. Capital says: “Some members of the MPC might put more weight on the downside risks to GDP growth and, for fear of aggravating the already significant headwinds facing the economy, conclude that they do not want to increase the rate as fast or as far as before. destined.”

The Resolution Foundation says inflation for the poorest households could top 10% by the fall. Sunak has a spring statement on March 23 and should be able to report government coffers are in better shape than expected, which his critics will say gives him leeway to be nice.

The resolution states that “the Chancellor is heading into the Spring Statement with good news on public finances but terrible news on family finances”.

So he could afford to delay the April National Insurance hike which is set to cost the average worker £250 a year. So far, the Chancellor has indicated her reluctance to do so.

Food prices are also soaring. Ronald Kers, boss of food company 2 Sisters, today said food prices could rise by 15% this year.

Such increases will affect consumer spending and lead to a fall in GDP, which should in turn reduce inflationary pressures over time, the economists note.