The new prime minister of England promised to ease the pain caused by the increased gas rate amid rising inflation. However, the PM’s proposed plan will not stop the plan by the Bank of England to raise interest rates to fight inflation.
The Increase In Interest Rate
Economists believe the proposed price ceiling for energy revealed by Liz Truss will help reduce the expected increase in Bank rates. The cost of the power cap is around £100B, and it is likely to last for at least two years.
Meanwhile, this action will assist the Apex bank in fighting inflation. Although there will be a 5% expected increase in the interest rate, this is way lower than the calculated rate before the announced assistance.
However, the quest by political leaders to eliminate inflation will face a setback. According to analysts, the inflation rate will now jump to 11% against the targeted 2% by decision-makers.
The good news is that the households would have more funds at their disposal regardless of the threat of an increased inflation rate. England’s apex bank is, however, expected to raise its interest rate by 0.5% next Thursday, according to George Buckley’s forecast.
He added that the increased rate would hit an all-time high since 1995, a record it will share with August’s interest rate. Buckley is an economist at Nomura.
Huw Pill, Chief Economist at Bank of England, and James Smith added that the England apex bank would guarantee the plan by the government doesn’t increase inflation and also that it might delay the reduction in interest rates when other apex banks are doing so.
Chances Of Avoiding Recession
There are chances that the predicted economic meltdown will be avoided. This will, however, lead to a 0.5% increase in interest rates twice before December. Samuel Tombs further explained that the resultant 2.75% rate would be the highest since 2008. He added that the rate would last for a while.
Meanwhile, there have been joint efforts by the BoE and the ministry of finance to sort out the economic issues. Governor Bailey and Minister Kwarteng will meet twice weekly.
The finance minister will publicize the expected emergency budget before September ends. He will also announce a reduction in the tax rate. The fall in the value of Pounds to Dollars might also foster an increase in bank rates. A Dollar is now 0.8630 Pound which is the lowest it has dipped since 1985.
Most apex banks in Europe are increasing their rates to curtail inflation rates. This economic situation might even force the BoE to sell British government bonds. The recent unrest in the bond market could, however, will be an obstacle to selling the bonds.