Bank of England’s fight against inflation made harder

This week we saw the Bank of England make a big effort to try and get on top of inflation. The bank has been repeatedly caught out by inflation that has risen far higher and lasted far longer than predicted. It appears that the bank has finally realised that the UK’s inflation problem is much more severe than in other advanced economies. This week’s 0.5% hike was larger than expected but the market reaction was fairly calm.

The UK’s problems are illustrated by this morning’s news as consumer confidence is improving and activity in the services sector continues to grow (it was services spending that largely accounted for the higher inflation reading this week). Retail spending is also on the rise. Governor Andrew Bailey made it clear that rising rates will hit household finances, particularly through rising mortgage costs. However, the number of people on fixed-term mortgages means the impact of higher borrowing costs will be staggered and it will take time for rate hikes to take full effect. In the meantime, the risk has increased that the Bank will go too far in its efforts to regain the initiative and try and restore its credibility.

For the following stories, please click on this link*

• UK: Bank opts for bigger hike as inflation remains unchanged
• China: Central bank cuts rates to revive consumer demand
• Equities: Retailers experience mixed fortunes from inflation

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