Biggest rise in US interest rates since 1994

Martin Beck, chief adviser to the EY Item Club, said higher US interest rates and the lower pound would put more pressure on the Bank of England to accelerate rate hikes.

He said: “It puts more pressure on them to tighten up. But whether they want to do that too blatantly is another question — if they do, it could erode trust. When people say they are [raising rates sharply] because the pound is falling, it suggests an element of panic.”

Traditionally the Bank would “overlook” the inflation caused by a fall in sterling and let the impact fade over time, but now “the Bank will be more concerned as it links to other inflationary forces,” Mr Beck said.

Recession fears are also limiting the MPC’s appetite to follow the Fed. The UK economy posted a surprise 0.3 percent contraction in April.

The Organization for Economic Co-operation and Development is forecasting zero growth for next year, the weakest forecast for any major economy.

But Mark Carney, a former governor at the bank, said central bankers “need to keep up with their economies,” suggesting they “prefer” rate hikes.

He said: “They were behind the curve, they acknowledged that.

“And they need to start getting interest rates effectively above inflation, or at least inflation expectations.”

Inflation in the UK is now at 9 per cent, the highest since the early 1980s and four and a half times the Bank’s 2 per cent target.

The bank has raised interest rates from 0.1 percent to 1 percent since December so far, but CMC Markets’ Michael Hewson said the dollar’s rise is undoing much of the work of the Bank of England, which is trying to stem inflation.

“Since December, the pound is down 10 percent against the US dollar and down 15 percent over the last 12 months, completely negating any impact higher interest rates may have had in controlling import inflation,” he said .

“The fall in the pound has seen Brent crude oil prices soar to over £100 a barrel in sterling terms and – given that commodities are priced in US dollars – has taken the inflationary shock to the UK Economy due to other food price measures also strengthened.”

George Buckley, UK chief economist at Nomura, said that a 10 percent fall in sterling the following year increases inflation by about 0.75 percentage point.

“It’s more than any other major developed economy – more than Europe, the US or Japan. We are more sensitive as we have more imports and exports to GDP than these countries,” he said, noting that the pound is approaching the low $1.16 levels last seen in the 1980s.

However, this does not automatically mean that the bank will bow to the pressure. The fall in sterling should only boost inflation for a relatively short period of time before prices level off again.

In the past, Mr Buckley said, the Bank of England has taken the view that a rise in US interest rates should slow the world’s largest economy, hit a key export market for British companies and so in turn slow and potentially collapse the UK would increase the interest requirement here.

Fed policymakers lowered their forecasts for economic growth while raising forecasts for inflation.

They now expect the economy to grow just 1.7 percent this year and again in 2023, compared to March forecasts of GDP growth of 2.8 percent and 2.2 percent in the respective years would rise.

At the same time, inflation is worsening, averaging 5.2 percent for the year instead of the 4.3 percent expected in March.

Analysts fear sharply higher borrowing costs later this year or in 2023 could risk a US recession with dire consequences for the rest of the world. Biggest rise in US interest rates since 1994

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