Bank of England expected to accelerate its inflation fight

The Bank of England (BoE) is expected to step up its fight against inflation in the coming week, joining some 70 other institutions around the world in delivering a half-point increase in borrowing costs.The move anticipated by most analysts and investors would mark the UK’s biggest increase in interest rates in 27 years and accelerate a historic pivot away from the era of cheap money. Governor Andrew Bailey has suggested the hike won’t be the last, saying policy makers are prepared to act “forcefully,” if necessary, to rein in inflation.The BoE was first among major-economy central banks to raise rates after the pandemic, but is struggling to keep up with the US Federal Reserve, which has delivered back-to-back 75 basis-point hikes. Key rates now stand at 1.25% for the BoE, 2.5% for the Fed, and zero at the European Central Bank.The UK central bank’s move will add to the pressure on contenders seeking to replace Boris Johnson as prime minister. Foreign Secretary Liz Truss has promised tax cuts if she wins the race to lead the ruling Conservative Party. Former Chancellor of the Exchequer Rishi Sunak says that would fan inflation, forcing interest rates to go even higher. With the BoE expecting prices to leap as much as 11% this year, consumers are feeling the sharpest squeeze in living standards in at least two decades and are calling for aid from the government. Even so, a half-point rate rise is no longer a sure thing. Risks of a recession prompted investors to pare back bets on a big hike on August 4. They now see a 70% chance of a move that size, down from near certainty just a week ago. “The BoE signalled at its June meeting that it would ‘act forcefully’ if it saw signs of persistent inflationary pressure. We think the run of data since then will prompt a 50-basis-point hike in August. We expect policy makers to vote 7-2 in favour of raising rates to 1.75% from 1.25%. Jon Cunliffe and Silvana Tenreyro will probably favour a 25-basis point increase. Market pricing suggests a roughly 70% chance of a 50-basis point move,” says Dan Hanson, senior economist. Elsewhere, the US jobs report on Friday is unlikely to back a broader recession narrative, while central banks in Australia, India and Brazil are among those predicted to hike rates.US employers probably added jobs at a healthy but more moderate clip in July and the unemployment rate continued to hold near a five-decade low, economists project the government to report on Friday. The data are expected to show a still-robust labour market - despite reports that some companies, particularly in the technology industry, are laying off workers or slowing hiring.Earlier in the week, the government will issue its count of job vacancies in June. While openings have eased in recent months, they remain elevated and not far from the record 11.9mn seen in March. Investors will also hear from a smattering of Fed officials this week, including regional presidents Loretta Mester, James Bullard and Charles Evans. After raising their benchmark interest rate by 75 basis points this past week, central bank watchers will listen for any clues on whether a similar-size rate hike is needed in September, after recent data showed a weak economy and persistent inflation. Canada is also set to publish its July jobs report on Friday. Economists predict an increase in employment after a large number of workers dropped out of the labour force in June.China’s factory activity unexpectedly contracted in July, reversing earlier economic momentum as sporadic Covid outbreaks weigh on the recovery. Gauges from other regional economies follow on Monday. Hong Kong’s economy probably contracted in the second quarter, tipping the economy back into recession for the first time since 2020. Reserve Bank of Australia chief Philip Lowe is widely expected to raise interest rates tomorrow as he continues to make up for lost time in the fight against accelerating prices. The latest figures show headline inflation over 6%, not as rampant as feared, suggesting a half-percentage point hike will be sufficient. Attention will therefore likely focus on the rate trajectory going forward. Inflation data out of South Korea the same day will shape expectations for the Bank of Korea’s next policy decision later in August. Export data for July will show how global demand is holding up, while providing the latest gauge of how a weak won and soaring import prices are exacerbating the country’s recent trade deficit. Japanese wage and household spending numbers at the end of the week are likely to support the Bank of Japan’s view that stimulus must continue for now. India’s central bank on Friday is expected to continue with monetary policy tightening as it seeks to defend the rupee and quell inflation, with markets closely watching for guidance on the future pace of increases.In the run-up to the BoE decision, manufacturing PMIs today and UK house prices tomorrow are set to show a slowdown in the economy.In Germany, which just reported a surprise stagnation for the second quarter, June factory orders and industrial production readings toward the end of the week are predicted to confirm that Europe’s biggest economy is on a weak footing.On Thursday, the Czech central bank will decide on rates for the first time since the reconstitution of its policy-making board, with more dovish members replacing people who backed an unprecedented wave of nine interest-rate hikes since last year.A day later, Romania is poised to further increase borrowing costs to try to tame the fastest inflation in almost two decades, and is likely to keep up the 100 basis-point hiking pace. Rate setters will also approve a new inflation forecast.Further south, data published on Wednesday is expected to show Turkish inflation accelerating further in June, possibly breaching 80% on an annual basis. The central bank raised its year-end inflation estimates last week, but said it sees price rises slowing, something most economists doubt. In Saudi Arabia, the economy expanded 11.8% in the second quarter, maintaining the fastest pace of growth since 2011 buoyed by higher oil prices and production, preliminary estimates released yesterday show.Data from Mauritius on Friday may show inflation slowed for a third straight month. That may prompt the central bank to keep interest rates on hold when it meets in August. Bank of Mauritius Governor Harvesh Seegolam earlier this month said future rate decisions will be based on domestic fundamentals, rather than mirroring the global trend to tighten monetary policy aggressively.