The ever-rising prices and the cooling of economic growth are creating a dilemma for the British central bank. A few weeks ago, the Bank of England (BoE) warned that interest rates should be raised in the coming years.
But now that the recovery is stagnating and inflation is rising, policymakers need to strike a good balance in driving up borrowing costs without curbing growth too hard.
British economic growth in July was lower than forecast, and the economy is expected to lag earlier estimates by the BoE for the second half of the year. Moreover, in response to the sharp rise in inflation, the financial markets anticipate higher borrowing costs in the first half of next year. These contradictory developments put policymakers in a precarious position.
On the one hand, they must remain credible in stabilizing prices. But, on the other hand, it is also essential to help the UK recover from the deepest recession in three centuries.
Figures from market researcher Markit also showed that activity in the UK economy is cooling down due to supply chain problems and rising prices, among other things. Indeed, the UK private sector experienced its weakest month since its recovery from the crisis, proving that the recovery is facing significant headwinds.
Another factor is the fact that the United Kingdom is in specific sectors with significant staff shortages, including as a result of Brexit. This is the case in the processing industry, for example. As a result, factories and service companies also raised prices briskly to pass on rising costs for wages, transportation and products.
The BoE will make its interest rate decision later on Thursday.