Written by Shane Balkham.
The tightening of monetary conditions continued last week with the Federal Reserve hiking rates by 0.75%, repeating the size of the hike that was made last month. The Fed has raised rates by 2% over the past three meetings, intensifying the efforts to combat inflation and recover some level of credibility. However, during the press conference Fed Chair Jerome Powell alluded to a slowing in the pace of tightening at future meetings, to allow for an assessment on the effect that the rate hikes are having on the US economy. Powell confirmed that future decisions will be wholly data dependent and made on a meeting-by-meeting basis.
This adds pressure to the Bank of England to follow the lead set by the Federal Reserve last week and the European Central Bank the week before. The Monetary Policy Committee has been consistent in raising interest rates by 0.25% for each meeting since December 2021 and has acknowledged that it may need to act more forcefully in response to what they see as persistent inflationary pressures.
Governor Andrew Bailey has made it clear that a hike of 0.5% is one of many options currently on the table for discussion on Thursday. Not only does the Committee have to consider a slowing UK economy, but they also need to be cognisant of political promises being made in the Conservative leadership race. Pledges of tax-cuts could lead to interest rates being hiked further.