Bank of England Faces Pressure for Further Rate Hikes

The Bank of England has been urged to raise interest rates to five percent. New analysis shows that inflation may not reach the two percent target until 2030. The National Institute of Economic and Social Research (NIESR) stated in its autumn report that the Bank's recent decision to increase rates to four percent may not be enough to fight rising inflation. This inflation is driven by geopolitical tensions, including the war in Iran. NIESR warned that inflationary pressures could become entrenched in the economy. This is due to expectations of ongoing price growth and not enough slack in the labor market.

Key Details

In a related commentary, Bank policymaker Ms. Lombardelli highlighted the risks of inflation exceeding current forecasts. She suggested that another rate hike could be needed soon. After the Bank's decision to raise rates from 3.75% to 4%, she noted that inflation is expected to rise to around five percent by the second quarter of 2027. This is up from the current rate of 3.5%. Lombardelli emphasized the need to monitor the labor market closely. She stated, "The balance of risks to inflation remains to the upside."

Background

The NIESR report pointed out that about 75% of UK workers are set to negotiate pay settlements in early 2024. This coincides with expectations of peak inflation above four percent. This situation raises concerns about possible wage-price spirals. Such spirals could complicate the Bank's efforts to stabilize prices. The Bank of England's Monetary Policy Committee has previously warned that high unemployment could weaken workers' bargaining power for wage increases. This complicates their strategy to control inflation.

Based on reporting by: cityam.com, standard.co.uk