Market chaos leaves an interest rate rise hanging in balance
By Patrick Tooher
dmg media (UK)
AN INTEREST rate rise hangs in the balance after last week’s turmoil in the banking sector. A quarter point jump in the cost of borrowing, currently at 4 per cent, had been widely expected when the Bank of England’s ratesetting Monetary Policy Committee meets this week. But the sudden collapse of Silicon Valley Bank – whose UK arm was rescued by HSBC – and bailouts for Credit Suisse and First National in the US have raised wider concerns about financial stability. That poses a dilemma for the Bank as it tries to curb inflation, which is expected to fall to just below 10 per cent when latest figures are announced on Wednesday. Senior Treasury officials believe it could halve to about 5 per cent in coming months as the spike in fuel and food prices caused by Russia’s invasion of Ukraine fades. Core inflation is concentrated in the services sector, which is one reason why the Government is taking a tough line on public sector pay talks, Treasury sources added. If inflation falls as expected, that should dampen wage demands, which will be a relief for Chancellor Jeremy Hunt. The Office for Budget Responsibility, the fiscal watchdog, also thinks inflation will be tamed, with the headline rate tumbling to 2.9 per cent by the end of this year. Experts say the prospect of inflationary pressure easing may encourage the Bank of England to pause its recent series of aggressive rate rises. But its immediate priority is to help calm markets roiled by the failure of three US banks in a week and the unfolding crisis at Credit Suisse – one of the world’s systemically important banks – which has been thrown a £45 billion lifeline. ‘We anticipate the Bank will keep rates steady for now,’ said Sandra Horsfield, economist at wealth manager Investec, who had previously expected a quarter-point rise. ‘The degree of conviction in this view is necessarily small when inflation is still in double-digits but stability concerns have suddenly surged.’ The Federal Reserve, the US central bank, is also expected to keep rates on hold this week. It has already pumped £270billion into the American banking system, prompting fears among some experts that inflation will head much higher. Even if the Bank presses ahead with another rate rise, analysts reckon it will be the last in the current cycle – with the cost of borrowing to start falling in the summer.