The Bank of England is faced with a crucial choice as it navigates a plunging currency and the effects of a new government energy cost package that has changed the inflation outlook.
The Monetary Policy Committee will announce its latest decision on Thursday, with analysts divided over whether to expect a hike to interest rates of 50 or 75 basis points.
U.K. headline inflation dipped to an annual 9.9% in August, according to initial estimates from the Office for National Statistics, down from July’s 10.1%, led by a fall in motor fuels.
But economists were skeptical as to whether this signaled that inflation has peaked, and are awaiting details next week on a new government fiscal package, which will include a cap on household energy bills.
At its previous meeting, the Bank of England projected that inflation would hit 13.3% by the end of this year, with the likes of Citi and Goldman Sachs forecasting eye-wateringly high consumer price index prints early next year.
Much has changed since then. The Bank’s inflation projections will likely be revised down in light of the announcement of measures from new Prime Minister Liz Truss’s government.
Yet the additional government support may potentially result in higher medium-term inflation, economists have warned, while the MPC is also navigating sluggish growth and an extremely tight labor market.