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Monday, Dec 08, 2025

Bank of England on “collision course” with City over inflation and interest rates

Bank of England on “collision course” with City over inflation and interest rates

Some in the Square Mile want the Bank to move much more quickly as the economy recovers
The Bank of England looks increasingly at odds with the City over inflation and interest rates.

Some think the Old Lady of Threadneedle Street is on a collision course with the Square Mile, which fears rate setters are behind the economic curve.

This week the Bank’s Monetary Policy Committee meets to discuss interest rates and quantitative easing. No move in rates from record lows of 0.1% is remotely likely – it would be a shock if there were a shift.

And the Bank will probably hold its QE policy at £895 billion, ignoring calls from outgoing chief economist Andy Haldane to cut it by £50 billion.

Haldane has warned of the “beast of inflation” and thinks heat needs taking out of the economy right now.

The City is keen to at least see some sense of direction from the Bank about whether it might move interest rates before the US Federal Reserve does.

Inflation just hit 2.1%, going over the Bank of England’s 2% target for the first time in many months. Moreover, economists noted how quickly it seems to be rising, jumping from 1.5% previously.

Some think the Bank is too sanguine about inflation and should move interest rates up more quickly to head it off. So far, the Bank’s view – Haldane aside – has been that the recovery isn’t sufficiently embedded to take the risk of dampening consumer and business spending.

ING said in a note: “A recent speech by a normally-dovish committee member has sparked a debate on whether the Bank of England will hike rates in 2022, ahead of the Fed. We wouldn’t rule this out, though for now we’re in the camp looking for the first move in early 2023. Either way, we suspect policymakers will be keen to avoid offering new hints at Thursday’s meeting.”

The normally-dovish MPC member was Gertjan Vlieghe, who said last month that if the labour market proves stronger than expected rates could do up sooner than the City realises. Since then, most signs have employment – and most crucially, pay, well on the up.

The Bank of Canada is already talking about a rate hike in 2022, something that may give it first mover advantage among major economies emerging from the pandemic.

Last week the Fed was also hawkish, with observers now predicting it might move rates before the market expects.

Antoine Bouvet at ING said: “In reality, we don’t think the Bank will say anything particularly new on the timing of rate hikes at this next meeting…For now, we’re in the camp looking for the first-rate hike in 1Q23. We certainly wouldn’t rule out an earlier move though. Possible triggers could include a more rapid unwinding of household savings, given the economic outlook is particularly sensitive to even small percentage changes in the amount of the savings stockpile that is spent (the BoE assumes roughly 10%). Wage growth is also key, and there are already anecdotal reports of firms facing shortages of staff in hospitality, though our feeling is that this is likely to prove temporary.”

So the consensus remains that inflation spikes will be short-lived, but interestingly even economists sure of that are increasing their predictions for how high it will go.

Capital Economics now says it will peak at 2.9% later this year, up from a 2.6% forecast previously.

Even if this turns out to be right, there is a growing view that the Bank should at least signal that the crisis is past by moving rates up from extraordinary lows of 0.1%.

A move to 0.25% or 0.5% would still leave borrowing costs extremely low. If further economic woes emerge, the Bank would at that point at least have something to cut.

The MPC rules on Thursday. The City is watching with more than usual interest.
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