Key events

The Bank of England is caught between the threat of prolonged high inflation and the risk of “a continued slowdown in economic growth and/or a potential financial crash,” says Oliver Blackbournportfolio manager in the Multi-Asset team at Janus Henderson Investors.

Blackbourn adds:

Markets have been weighed recently by this latest fear, with banks being wound up or merged in both United States and Europe.

The Bank of England hopes it can avoid such a situation in the UK, but it must weigh this risk against the cost to the population of possibly prolonging cost-of-living pressures. The bank has to walk a very narrow path as increased borrowing costs are really starting to bite, but inflation is still well above the target rate of 2%. The latest forecasts show inflation at 3.9% in late 2023 but 1.0% in mid-2024.

Being able to see through the current high inflation can only be considered a suitable reason not to raise interest rates significantly further if inflation can be demonstrably moderated. Today’s data will challenge that.

Introduction: The Bank of England sets interest rates today

Good morning and welcome to our rolling coverage of business, financial markets and the world economy.

With inflation alarmingly high and the banking system in turmoil, these are difficult times for central banks.

And today, the Bank of England will reveal whether it had pushed up UK borrowing costs again, or left interest rates frozen at 4%.

Yesterday’s shock rise in UK inflation, to 10.4%, has many investors expecting the BoE’s Monetary Policy Committee to raise Bank Rate by a quarter of a percentage point today, to 4.25%.

A chart showing inflation in the UK

It would be the 11th rate hike in a row, extending a tightening cycle that began in December 2021.

But the bank’s policymakers may be wary of pushing interest rates higher, as troubles in the banking sector this month have shown that the impact of last year’s rate hikes is now being felt.

The BoE could be mulling a ‘dove hike’ – raising borrowing costs, while signaling that interest rates may be close to their peak. But it would be more appealing if inflation wasn’t at double-digit levels.

Ellie Henderson, economist on Investec, explaining:

When deciding on the appropriate level of the Bank Rate, the MPC must assess the lesser of two evils: the risk of inflation being higher for a longer period of time or the current threat to financial stability arising from the rapidly growing fear of a banking crisis.

In an environment where inflation is re-accelerating, the question is whether the MPC will continue to raise rates or take a wait-and-see approach given the events that have unfolded over the past week or so.

Last night the US Federal Reserve raised its key interest rate by a quarter point, as US central banks weighed the worst banking crisis since 2008 and the highest inflation in a generation.

But the Fed also indicated it was moving to pause further increases in borrowing costs amid recent turmoil in financial markets.

Edward Park, investment manager at Brooks Macdonaldsays setting monetary policy against a backdrop of market volatility and inflation uncertainty is “an unenviable task”.

There are two camps in the market – those who see the current risks to financial stability as an existential problem and those who see persistent inflation as a greater evil. Fed Chairman Powell had previously said the Fed was “prepared to increase the pace of rate hikes” to address the stickier inflation seen in the latest CPI release.

“The announced 25bp rate hike represents a middle ground between the hawks and doves. It acknowledges sticky US inflation while paying attention to the macroeconomic risks posed by the banking sector. Equity markets initially reacted positively to the announcement, as it struck a balance between addressing with investor concerns about bank contagion and indicating that the central bank is taking inflation levels seriously.

We also receive interest rate decisions Switzerland – where policy makers have been busy fighting the banking crisis – and Norway.

The agenda

  • 8.30 GMT: Swiss National Bank rate decision

  • 09.00 GMT: Norges Bank’s interest rate decision

  • 9.30 GMT: Real-time data on the UK economy and business insight

  • Noon: Bank of England interest rate decision

  • 12.30 GMT: US weekly jobless claims

  • 15:00 GMT: Eurozone Flash Consumer Confidence