Market chaos leaves an interest rate rise hanging in balance

Interest rate rise remains balanced after turmoil in the banking sector: a quarter-point increase in borrowing costs was widely expected

Hopes: Chancellor Jeremy Hunt

After last week’s turmoil in the banking sector, a rise in interest rates is at stake.

A quarter point jump in the cost of borrowing, currently 4 percent, was widely expected when the Bank of England’s rate-setting Monetary Policy Committee met this week.

But the sudden collapse of Silicon Valley Bank – whose UK arm was bailed out by HSBC – and the bailouts for Credit Suisse and First National in the US have raised more concerns about financial stability.

That poses a dilemma for the bank, which is trying to curb inflation, which is expected to fall to just below 10 percent when the latest figures are released on Wednesday.

Senior Treasury officials think it could halve to about 5 percent in the coming months if the spike in fuel and food prices caused by Russia’s invasion of Ukraine eases.

Core inflation is concentrated in the services sector, which is one of the reasons the government is cracking down on public sector wage negotiations, Treasury Department sources added. If inflation falls as expected, that should dampen wage demands, which will come as a relief to Chancellor Jeremy Hunt. The Office for Budget Responsibility, the fiscal watchdog, also thinks inflation will be tamed, with the nominal rate falling to 2.9 percent by the end of this year.

Experts say the prospect of easing inflationary pressures may prompt the Bank of England to pause its recent series of aggressive rate hikes. But the immediate priority is to help soothe markets troubled by the collapse of three US banks in a week and the unfolding crisis at Credit Suisse – one of the world’s systemically important banks – which has a £45 bailout. billion received.

“We expect the Bank to keep interest rates stable for the time being,” said Sandra Horsfield, an economist at asset manager Investec, who had previously expected a quarter-point increase. “The degree of conviction in this view is necessarily small if inflation is still in the double digits, but stability concerns suddenly emerge.”

The Federal Reserve, the US central bank, is also expected to leave interest rates unchanged this week. It has already pumped £270bn into the US banking system, leading some experts to fear inflation will be much higher. Even if the Bank goes ahead with another rate hike, analysts think it will be the last in the current cycle, with the cost of borrowing starting to fall in the summer.