Bigger interest rate hike on the way after inflation hits 9.4%, say experts

A bigger hike in interest rates is on the cards for August as the latest surge in inflation to 9.4% has made the Bank of England’s slow and steady approach seem “pedestrian”, according to experts.

Many economists are forecasting that the Bank of England will vote for a 0.5 percentage point increase next month, which would take interest rates from 1.25% to 1.75% – the highest level since December 2008.

It comes after Bank governor Andrew Bailey confirmed in a speech in London on Tuesday evening that a 0.5 point rise will be one of the options being mooted at the next policymaker meeting on August 4.

This time, a larger interest rate hike is virtually priced in

The Bank has so far opted for smaller 0.25 point interest rate rises, although some of the Monetary Policy Committee (MPC) members have argued for steeper increases.

Ben Laidler, global markets strategist at social investment network eToro, said the Bank’s “slow and steady approach now seems pedestrian” in light of the latest figures.

He said UK inflation is “the second-highest inflation of any developed economy, behind only Spain”.

He added: “Stubbornly high inflation should jolt the Bank of England to more aggressive interest rate hikes at its August 4 meeting.

“Canada and US are raising interest rates up to four times as fast, despite lower inflation rates than the UK.”

The US Federal Reserve recently hiked rates in America by 0.75 points in its biggest increase since 1994, with another 0.75 point rise on the cards.

James Smith, developed markets economist at ING, said: “This time, a larger interest rate hike is virtually priced in.

“With the Federal Reserve likely to implement another 0.75 point hike and in light of recent sterling pressure, we narrowly think the committee will opt for a 0.5 point move next month.”

One of the Bank’s MPC members, Michael Saunders, said earlier this week that it is not unrealistic to see rates hitting 2% or more in the next year.

But Mr Smith said he believes the Bank may be nearing the end of its current round of rate rises, with signs that inflation may not be spreading as widely throughout the economy as feared.

Samuel Tombs at Pantheon Macroeconomics added that although “the headline rate of CPI inflation now looks set to rise to nearly 12% in October”, the core level of inflation “remains on a downward path, easing to about 5% by year-end and to around 2% or so in one year’s time”.

The outlook is far from uncertain, however, in particular given that the tax cuts being promised by candidates to replace Boris Johnson as prime minister may end up fuelling price rises, according to Ellie Henderson at Investec Economics.

She said: “Many of the frontrunners to replace current PM Boris Johnson, former chancellor Rishi Sunak aside, have promised sweeping tax cuts as part of their leadership campaign.

“Such tax cuts may help stimulate the economy but also risk creating more entrenched underlying inflation.”