The Bank of England raised the cost of borrowing from 3.75% to 4%, but the National Institute of Economic and Social Research warned this timid adjustment could keep inflation above target until 2030. Escalating fuel prices linked to Middle East conflict continue to push up inflation, which sits at 3.5% and is projected to exceed 4% early next year. Niesr cautions that workers negotiating inflation-linked pay rises could further embed these price pressures into the domestic economy. Meanwhile, deferred fiscal decisions by the government threaten to open a £30bn shortfall in public finances, creating additional borrowing risks.
Key points
Hesitant interest rate increases risk embedding high inflation into the economy through i…: Hesitant interest rate increases risk embedding high inflation into the economy through inflation-linked wage negotiations until 2030.
A failure to offset mounting government expenditures could generate a £30bn public financ…: A failure to offset mounting government expenditures could generate a £30bn public finance shortfall and increase financial market borrowing costs.
Persistent energy market disruptions and refining challenges are keeping consumer prices…: Persistent energy market disruptions and refining challenges are keeping consumer prices high despite temporary dips in crude oil benchmarks.
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The Bank of England is risking higher interest rates for longer after a hesitant response to rising inflation, according to leading thinktank.
In a searing critique of the central bank’s tactics, the National Institute of Economic and Social Research (Niesr) said a timid increase in interest rates last week was likely to mean inflation staying above the Bank’s 2% target until at least 2030.
The thinktank said inflation was likely to become a more persistent feature of the UK economy unless the Bank took tougher action.
The Bank’s monetary policy committee increased the cost of borrowing from 3.75% to 4% last week and hinted at another increase to combat inflationary pressure unleashed by the Iran war.
The director of the Niesr, David Aikman, urged the Bank of England to be more aggressive in tackling inflation, saying all the ingredients were in place for workers to demand inflation-linked salary rises.
“Inflation is set to rise above 4% in the new year, just as most pay awards for 2027 are being agreed, so the risk that it becomes embedded is rising.
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