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Bank of England could spring interest rate ‘jumbo hike’ today amid wage-price spiral fears

With inflation stuck at 8.7%, economists said a jump straight to 5% interest rates might be needed


he Bank of England is under huge pressure to hike interest rates even further and faster than previously thought, amid fears the economy could slip into a “wage-price spiral” otherwise.

Inflation didn’t budge in May, remaining at 8.7% despite supermarkets boasting of price cuts for certain food products. Core inflation, which strips out food and energy prices to create a less volatile picture of domestic inflation, rose from what was already a 30-year high to hit 7.1%.

David Bharier, head of research at the British Chambers of Commerce, said: “What started as a commodity price shock has now created a wage-price spiral.”

With both figures ahead of City expectations for the fourth consecutive month, they fuelled fears that the Bank of England will have no choice but to increase the pace of its interest rate hikes as it aims to bring inflation down to 2%.

Rob Clarry, Investment Strategist at wealth manager Evelyn Partners, said: “Another month, another poor inflation print for the Bank of England to deal with.”

“The Bank’s monetary policy committee faces an unenviable task: bringing CPI back towards the 2% target without tipping the economy into a recession.

“Too much tightening too soon could trigger a downturn; too little could enable second-round effects to take hold, where higher input costs are reflected in higher wages, otherwise known as a wage-price spiral.”

Experts at Capital Economics said the figures mean the Bank is now likely to raise rates by half a percentage point straight to 5%, rather than the previously expected 4.75%. Meanwhile, Matthew Ryan, head of market strategy at global financial services firm Ebury, said there was a 50% shot of a “jumbo hike” tomorrow.

Charles White Thomson, CEO at Saxo UK, also said a half-point rise was likely. He said: “There is a strong argument for a 50-basis point hike at tomorrow’s Bank of England’s meeting.

“The Bank needs to take the initiative quickly.  The risk for further policy failure is real and the stakes are getting increasingly high.”

Sir Charlie Bean, former BoE deputy governor for monetary policy, told BBC Radio 4’s Today programme: “If I was on the (MPC) committee, I would probably vote for a 50 basis point increase.”

“I’m sure on the committee there will be quite a lot of discussion over whether to go for a quarter or a half.

“If you go back to the last meeting, they might have thought they are in a position where they could afford to pause for a little bit.

“But the news since the last meeting has been unambiguously bad on the inflation front.”

As the year goes on, Threadneedle Street looks set to keep hiking interest rates, with markets now  seeing it as likely that the Bank Rate will peak at 6% by December. That could mean mortgage rates of close to 9%.

But Martin McTague, chair of the Federation of Small Businesses, warned that further hikes may lead to many smaller companies going bust.

He said: “The potential economic fallout from high interest rates isn’t confined to balance sheets - it will affect every aspect of our society, from employment rates to consumer spending and beyond, so we urge the Bank of England to show moderation.”

Two-gilt yields, which lenders use to price fixed-rate mortgages and are heavily influenced by the expected Bank Rate, soared back above 5%, leading to even higher monthly payments for homeowners whose fixes are set to expire soon.

Jamie Elvin, director at mortgage broker Strive Mortgages, said: “I fear for the property market, and a house price crash seems inevitable at this point.”

Rising rates will also put increasing pressure on government borrowing, as public debt exceeded GDP for the first time since 1961 following higher-than-expected May borrowing figures of £20.0 billion.

With interest payments on the Government’s debt rising, the Chancellor may be forced into further fiscal tightening to keep the debt burden under control.

The Bank will reveal its decision on interest rates at noon today.

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