BoE all set to raise borrowing costs to highest level in 33 years

The Bank of England looks set to raise borrowing costs by the most since 1989 next week even as it prepares for a recession that could be deepened by spending cuts under new Prime Minister Rishi Sunak. Analysts believe that BoE at its eighth meeting not only raise the interest rates to tame inflation above 10 per cent- this time by three-quarters of a percentage point, BoE will become the world's first big central bank to start selling bonds from its stimulus stockpile.
 
After a period of turmoil in Britain, caused by the economic plans of former prime minister Liz Truss which sparked a bond market rout, the BoE's double-barrelled monetary tightening might look at odds with its current forecasts that the economy will be shrinking until 2024. But with inflation still set to be way above the BoE's 2% target in 2023 and some of Truss's costly help for households and businesses still in place, the only way is up for borrowing costs.
 
"As things stand, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August," BoE Governor Andrew Bailey said on Oct. 15. On Aug. 4, the BoE raised rates by half a percentage point, its biggest increase in 27 years, and did so again in September. Some of Bailey's inflation worries eased two days after he spoke when new finance minister Jeremy Hunt reversed almost all the tax cuts planned by Truss and shortened her income-boosting energy cap programme to six months rather than two years. But the ongoing spread of inflation through Britain's economy this year means the BoE remains on high alert.
 
The BoE's plan to start selling some of the bonds it bought since 2009 to support the economy will also ease some of the pressure to raise rates. Deutsche Bank said the planned 40 billion pounds' worth of sales over the next year were equivalent to about 25 basis points of rate hikes. But Goodwin at Oxford Economics warned of potential dangers in the plan.