The Bank of England is expected to raise the interest rate for the 11th time in less than 18 months after Wednesday’s surprise jump in inflation.
It is due to announce its latest decision at noon as it tries to reconcile the UK’s weak economic outlook and an international banking crisis.
The BoE faces a difficult balancing act, weighing up the need to rein in inflation with the worries over banking woes and the possibility they may start to clamp down on lending.
Last month the raise in interest rates meant it was the highest in 14 years.
Yesterday’s data – showing inflation rising to 10.4% in February rather than continuing its descent – immediately turned today’s announcement into an almost one-way bet on a quarter-percentage-point increase in Bank Rate.
Financial markets widely expect a 0.25 percentage point hike to 4.25%.
It comes after inflation hit a 41-year high at 11.1% in October last year.
As recently as Tuesday, investors were split almost 50-50 on whether the BoE would leave Bank Rate unchanged for the first time since November 2021.
Bets earlier this week on the BoE halting its run of rate hikes were further bolstered by the rescue of Credit Suisse and the collapse of Silicon Valley Bank which showed how some global banks were struggling to adjust to higher borrowing costs.
Any increase in Bank Rate would be part of a series of measures to reduce inflation, but would inevitably increase pressure on many people, particularly mortgage holders, already being squeezed by the cost-of-living crisis.
The European Central Bank also raised its three main interest rates by 50 basis points last week despite financial market turmoil engulfing Credit Suisse and the collapse of Silicon Valley Bank.
While some of the inflation rise can be blamed on one-off factors such as vegetable shortages, the underlying measures that the Bank of England tracks have also increased.
It was the first major central bank to start raising interest rates in December 2021.
NG economist James Smith said he expected any rate hike was likely to prove the last in the Bank of England’s run.
He said: ‘Assuming the broader inflation data continues to point to an easing in pipeline pressures, then we suspect the committee will be comfortable with pausing by the time of the next meeting in May.’
Shares on Wall Street tumbled sharply overnight on the Fed’s decision and its comments suggesting it does not expect to cut rates anytime soon, highlighting the fragility of stock market confidence.
After three days of bounceback gains, the S&P 500 fell 1.7%, while the Dow Jones Industrial Average lost 1.6% and the Nasdaq composite dropped 1.6%.
Some of the sharpest drops again came from the banking industry, where investors are worried about the possibility of more banks failing if customers pull out their money all at once.
Craig Erlam, a senior market analyst for Oanda, said: ‘Whatever flexibility the Bank of England may have thought it would have on Thursday was wiped out by Wednesday morning’s inflation data.’
He added there is ‘nothing that would justify a pause’ in raising interest rates, ‘even against the backdrop of financial stability concerns and the knock-on effects of aggressive rate hikes’.
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