Bank of England Ready to Respond to Inflation Pressure

The Bank of England (BoE) is expected to hike interest rates again this week as it continues to pull away from its pandemic-era stimulus that includes a slowing of its bond-buying plan.

A majority of influential economists said in a recent poll that the BoE would increase its interest rate in February to 0.5% from 0.25%. This comes shortly after another interest rate hike in December.

This back-to-back increase, the first of its kind since 2004, shows how serious the BoE is about tackling inflation.

UK inflation is expected to hit 6% by April, caused in part by high household energy costs, which are set to jump by as much as 50% in the coming months.

The BoE's stance differs from the European Central Bank, which appears set to leave its monetary policy unchanged at its next meeting on Thursday.

Investors are keenly watching for signs that the BoE intends to continue to be aggressive in tackling inflation. Some analysts envisage the interest rate hitting 1.5% by the end of 2022. 

What does this mean for me?

If rates do reach 0.5%, this is the point at which the BoE will begin a process of quantitative tightening. The latter is intended to normalize interest rates and cool inflation by increasing the cost of money, thus reducing demand for goods and services.

Bond investors should be particularly interested in the BoE’s intentions regarding quantitative easing. With higher interest rates, bond yields will invariably increase.