Bank of England come across climactic policy decision with the pound at multi-decade lows

September 22, 2022: -The Bank of England comes across with a crucial choice as it navigates a decreasing currency and the effects of a recent government energy cost package that has changed the inflation outlook.

The Monetary Policy Committee is announcing its recent decision on Thursday, with analysts divided more than whether to expect a hike to interest rates of 50 or 75 basis points.

According to initial estimates from the Office for National Statistics, U.K. headline inflation dipped to an annual 9.9% in August, down from July’s 10.1%, led by a decrease in motor fuels.

But economists were skeptical as to if this signaled that inflation has peaked and are awaiting details in the upcoming week on a new government fiscal package, which will include a cap on household energy bills.

In the last meeting, the Bank of England projected that inflation would hit 13.3% by the end of this year, with Citi and Goldman Sachs forecasting eye-wateringly high consumer price index prints next year.

Much has changed after that. The Bank’s inflation projections will likely be revised in light of the announcement of measures from new Prime Minister Liz Truss’s government.

Yet the additional government support may result in higher medium-term inflation, economists have warned, while the MPC is also navigating sluggish growth and a tight labor market.

Other central banks worldwide have acted aggressively to bring down inflation. On Tuesday, Sweden’s Riksbank is hiking interest rates by 100 basis points, warning that inflation was “undermining households’ purchasing power.”

The U.S. Federal Reserve is expected to lift its benchmark borrowing rate by 75 basis points on Wednesday, the third consecutive hike of that magnitude.

Markets expect the Fed to maintain its hawkish trajectory until inflation is controlled. This will supply further momentum for the U.S. dollar as investors seek a haven in the rising rate environment.

Meanwhile, earlier this month, the European Central Bank announced a 75 basis point increase to its benchmark deposit rate.

The British pound reached a fresh 37-year low against the dollar last week amid fears for the economy’s health, as the country’s cost-of-living crisis begins to weigh on activity.