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Bank of England to keep raising rates even as inflation expectations fall

William Schomberg

LONDON (Reuters) – The Bank of England is getting a short-term boost from Prime Minister Liz Truss’ huge Power Bill bailout in fighting inflation , but it still looks set for a big rate hike later this month.

Truss tariff cap – announced Thursday, expected to cost 30 £1 billion ($ 116 billion) or more years — which, according to economists, would push inflation to a peak 5 percentage points lower than earlier forecasts.

But at 08% – new estimates by several analysts – the highs of the recent surge in inflation will remain Well above the Bank of England’s 2% target did little to ease policymakers’ concerns that inflation expectations were ingrained in the economy.

Bank of England policy decision postponed until September 30 From September 15 due to national mourning following the death of Queen Elizabeth, but ecological economists said they did not expect the week-long delay to change the policy outlook.

A preliminary Reuters poll of 30 economists after Truss announced the price cap on Thursday showed that most People predict 50 an interest rate hike this month.

This would match last month’s rate hike, but only the second since

. The Bank of England has already raised bank rates by so much. Financial markets’ bets on a bigger 75 basis point rate hike have dwindled sharply since the Truss announcement.

Truss’ electricity price cap and support from planned tax cuts could create inflationary pressures as households will be thousands of pounds better off than they otherwise would be.

In response to this situation, the Bank of England may raise interest rates higher than previously expected.

“I suspect the size of the package could put pressure on MPC members,” said Nomura economist George Buckley.

He forecasts a 0.5 percentage point rate hike in September. 08 – Rate hikes will follow.

Bank of England chief economist Huw Pill said this week that the central bank will ensure government spending does not fuel inflation.

ING’s James Smith said the BoE could wait longer than other central banks before 2023.

“This could mean they have a lot less urgency to cut rates than the Fed or some other central bank that might cut rates by the middle of next year,” Smith

Recession averted?

The Bank of England’s recession forecast could be narrowly avoided, clearing the way for a recession, said Samuel Tombs of consultancy Pantheon Macroeconomics. A one-percentage-point rate hike next week, followed by a November hike.

This will raise the bank rate to 2.75%, which is from 2008, Tombs thinks it’s here to stay, well below financial markets’ bets of more than 4%.

Investec’s Philip Shaw said government stimulus and Bank of England rate hikes ended up pulling in different directions, raising the risk of policy confusion.

“The fact that the chancellor and governor appear to be engaging in the twice-weekly dialogue is encouraging from the perspective of policy coordination,” Shaw said.

New Finance Minister Kwasi Kwarteng and Bank of England Governor Andrew Bailey will meet regularly, initially twice a week, to coordinate economic support, the Treasury said on Wednesday.

Kwarteng is expected to announce an emergency budget, including tax cuts, later this month.

Equally likely to push BoE rates higher is the inflation-triggered drop in the pound, which this week fell to its lowest level against the dollar since 1995*), in part because of concerns about the size of Truss’ planned borrowings.

Other central banks are also actively raising interest rates to fight inflation. The European Central Bank raised its benchmark interest rate this week by 75 basis points, the largest move ever.

While raising interest rates, the Bank of England is about to start selling off the stockpile of UK government bonds that began to accumulate after the 2007 global financial crisis – .

MPC said last month it would sell in September “depending on economic and market conditions to be judged” as appropriate”.

Some economists believe the recent turmoil in the bond market could slow the Bank of England’s selling plans.

($1=0.8630 GBP)

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