The British central bank may raise interest rates after a sharp rise in food prices

LONDON (AP) — Something unexpected could force the Bank of England to approve an eleventh consecutive rate hike on Thursday: a shortage of fresh vegetables.

The battle for peppers, cucumbers and spinach last month helped push inflation to 10.4% in February, surprising analysts who expected prices to fall to single digits for the first time in seven months.

Before the figures were released on Wednesday, many economists suggested that the Bank of England leave rates unchanged. That comes amid concerns about the turmoil in the global financial system following the collapse of two US banks and the ensuing troubles at Swiss Credit Suisse, which forced a hastily arranged takeover by rival UBS.

But the unexpected rise in prices in the UK has refocused attention on stubbornly high inflation plaguing consumers and slowing economic growth.

Investors are now betting that the central bank will raise its policy rate by a quarter of a percentage point to 4.25%.

“After two weeks of financial market instability, expectations grew that the Bank of England would take a pause in its rate hike, and that cannot be ruled out,” said Danni Hewson, head of financial analysis at financial institutions. service company AJ Bell. “But (Wednesday) upward shift will be like dropping a rooster in the hen house.”

The US Federal Reserve weighed in on its risk assessment on Wednesday, raising its key interest rate by a quarter point as Fed Chairman Jerome Powell sought to reassure Americans that it is safe to leave money in their banks. A week ago, the European Central Bank raised interest rates by more than half a point, sweeping away the turmoil in the financial market and calling the European banking sector resilient.

Central bankers around the world struggle to balance competing economic demands as they try to rein in inflation, which erodes savings and increases costs for consumers and businesses, without causing unnecessary damage to economies weakened by the COVID-19 pandemic, the Russian war in Ukraine and now the banking turmoil.

But British policymakers face a different situation than their American counterparts.

Inflation has proved more persistent in Britain than in the US, partly because it is more exposed to the rise in natural gas prices following the Russian invasion of Ukraine. It is even more affected than mainland Europe, which came through the winter heating season largely without Russian natural gas supplies and has a lower inflation rate of 8.5% in the 20-country euro area.

The gas crisis took an unexpectedly large toll in February, when the high price of energy needed to heat greenhouses, combined with the bad weather in southern Europe and Africa, contributed to an 18% increase in food prices, the largest increase in 45 years.

The Bank of England and the government have done everything they can to prevent that cost pressure from becoming embedded in the economy, driving up wages and further fueling inflation.

February’s inflation data came as a “crushing blow” to the U.K. central bank, said Craig Erlam, a senior market analyst for currency trader OANDA. Concerns about the banking crisis no longer justify holding rates, he said.

“Any flexibility the Bank of England thought it had on Thursday was wiped out by Wednesday morning’s inflation data, and once again the topic of conversation has shifted to whether 0.25 percentage point will be enough,” Erlam said.

But others aren’t so sure.

Investec Economics predicted that the Bank of England would take a “wait and see” approach, keeping interest rates at 4% while weighing the impact of the banking crisis.

The central bank “will have to assess which is the lesser of two evils: the risk of inflation staying high longer or the current threat to financial stability posed by rapidly evolving fears of a banking crisis,” said Ellie Henderson, an economist at Investec. .






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