Bank of England set for biggest rate rise since 1989

The Bank of England plans to raise interest rates by three-quarters to 3% on Thursday, the biggest increase since 1989, as the country struggles with the highest inflation in 40 years.

The BOE has faced political and financial turmoil since it last raised rates on Sept. 22, the day before former Prime Minister Liz Truss' government launched an unfunded 45 billion-pound ($52 billion) tax relief package. 

The government policy was designed to prevent a recession and stimulate long-term growth, but instead the current plan has only contributed to the pound collapsing to a record low against the US dollar. Such a critical situation forced the Bank of England to support the bond market and led to Truss' resignation.

Markets are now more stable and the British government's borrowing costs are generally back to their original levels before the turmoil. On Tuesday, the Bank of England was able to launch a bond sale from its stock of 838 billion pounds.

However, the fundamental problems for the British economy still need to be addressed. Inflation returned to a 40-year high of 10.1% in September and probably rose even more in October when regulated energy prices jumped.

Shweta Singh, senior economist at the British fund manager Cardano, recently said that the Bank of England faces an incredibly difficult task in orchestrating a significant rate hike in a recessionary economy.

The lack of any clarity about further government policy makes it even more difficult for the bank.

The extent of this process will become clear after the November 17 financial report, regardless of the fact that most of the Truss tax cuts have been reversed and new Prime Minister Rishi Sunak has indicated that government spending cuts and the possibility of tax increases are necessary.

Government energy subsidies are due to end in April, so the Bank of England may predict a new peak in inflation when it updates its forecasts Thursday.

Cardano's leading economist also explained: if September's dilemma for the Bank of England was not tightening enough, November's dilemma is that they end up doing too much. Thus, it seems that the Monetary Policy Committee is "still stumbling around in the dark."

Investors expect the Bank of England rate to reach 3.5% in December and 4.75% next May, the highest level since 2008, though below the peak of about 6% predicted during last month's market turmoil.