Persistently high inflation increases chances of more interest rate hikes.

This week the Bank of England’s job appeared to get harder as it faces the problem of trying to tackle inflation without doing significant damage to the economy. Inflation running in double digits since September is very bad news, and when you add a strong employment market and private sector wages rising at more than 6% a year it is easy to see why markets are predicting further interest rate rises. Gilt yields extended their recent rise as investors now see rates increasing to 5% this year. But there are already strong signs that the UK’s economy is slowing down.

After being kept artificially low by government Covid-era support and ultra-low interest rates, insolvencies have jumped sharply. Consumer confidence is still very negative and retail sales are falling fairly quickly. There is also evidence of an economic slowdown in the US. The Bank of England may be tempted to act decisively in the short-term to help reduce expectations of future inflation. However, inflation is likely to fall quickly as energy prices fall out of the annual calculation and the risks of a hard landing, partly due to aggressive rate hikes, are coming in to view.

For the following stories, please click on this link*

  • UK – Headline inflation remains above 10%
  • US – Fed sees the economy slowing as bank profits fall
  • China – Return to growth as economy shakes off Covid effects

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