Rates are heading higher as government borrows hundreds of billions of pounds to support the economy.
could in fact stoke inflation, keeping it elevated for longer and justifying higher rates. It will require a delicate balancing act.There are other challenges too. For example, the government now needs to borrow hundreds of billions of pounds more than previously expected to fund its plans. But it will not occur at a time when the Bank of England is buying up huge quantities of government debt to support the economy, as it did after the financial crisis and during Covid .
Indeed, the Bank could be about to announce it is selling its government debts as part of the process of reversing QE. That would be a significant change. Then there is the bigger picture. By raising rates to control inflation - which is currently 9.9% - the Bank is effectively putting the brakes on the economy at a time when the new government wants to boost economic growth to an annualised rate of 2.5%. The Bank's actions are also designed to cool the housing market, just as the government reportedly wants to stimulate demand with a stamp duty cut.
In the US on Wednesday, the US central bank the Federal Reserve announced another jumbo rate rise, and more than that, its chair Jerome Powell signalled he would keep on raising rates and leave them at elevated levels until inflation falls to the bank's 2% target. "We're committed to getting to a restrictive level for the Federal Funds rate [ie US base rates] and getting there pretty quickly… there's a way to go," said Mr Powell last night after the Fed announced its third three-quarters of a percentage point rise. The news further bolstered an already strong dollar, pushing the underperforming pound to a new 37 year-low of $1.12.Those sorts of levels in the UK are now far from unthinkable.
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