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Market chaos leaves an interest rate rise hanging in balance

Prospects: Chancellor Jeremy Hunt

Will the banking turmoil block base rate hikes? Rising interest rates hang in the balance as Bank of England weighs next move

Prospects: Chancellor Jeremy Hunt

Prospects: Chancellor Jeremy Hunt

An interest rate hike is in play after last week’s turmoil in the banking sector.

A quarter-point increase in the cost of borrowing, currently at 4%, was widely expected when the Bank of England’s monetary policy committee met this week.

But the sudden collapse of Silicon Valley Bank – whose UK branch was rescued by HSBC – and the bailouts of Credit Suisse and First National in the US have raised wider concerns about financial stability.

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This poses a dilemma for the Bank as it tries to rein in inflation, which is expected to fall to just under 10% when the latest figures are announced on Wednesday.

Senior Treasury officials believe it could be halved to around 5% in the coming months as soaring fuel and food prices caused by Russia’s invasion of Ukraine s fades.

Core inflation is concentrated in the services sector, which is one of the reasons the government is taking a hard line on public sector wage negotiations, Treasury sources added. If inflation falls as expected, that should dampen wage demands, which will be a relief for Chancellor Jeremy Hunt. The Office for Budget Responsibility, the fiscal watchdog, also believes inflation will be brought under control, with the headline rate falling to 2.9% by the end of this year.

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Experts say the prospect of easing inflationary pressures could encourage the Bank of England to pause its recent round of aggressive rate hikes. But his immediate priority is to help calm markets troubled by the failure of three US banks in one week and the unfolding crisis at Credit Suisse – one of the world’s systemically important banks – which has been thrown a lifeline. bailout of £45bn.

“We expect the Bank to hold rates steady for now,” said Investec economist Sandra Horsfield, who previously expected a quarter-point hike. “The degree of conviction in this view is necessarily low when inflation is still in the double digits, but concerns about stability have suddenly increased.”

The Federal Reserve, the US central bank, is also expected to keep rates unchanged this week. It has already pumped £270bn into the US banking system, raising concerns among some experts that inflation may be heading much higher. Even if the Bank goes ahead with another rate hike, analysts believe it will be the last in the current cycle, with the cost of borrowing expected to start falling this summer.

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