The latest monetary policy committee meeting on Thursday comes amid concerns the Ukraine crisis could see the consumer prices index (CPI) inflation measure hit double figures.
A rise would be the third in the space of three months, but the British Chambers of Commerce (BCC) warned a further hike would undermine confidence and hit the finances of firms and households.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said the “breathtaking” rise in commodity prices since the invasion of Ukraine will worry policymakers.
“It is set to cause inflation to run even hotter than forecasts in the months to come. The double whammy is that these super-high prices affecting oil, metals and grains, may be hard to bear for companies and consumers, leading to less spending and investment, and could push the recovery into reverse,” she warned.
Ms Streeter said household confidence has already hit the lowest level in a decade, according to the most recent YouGov survey. “The Bank of England’s main task is to maintain stable prices and oversee financial stability, and rip-roaring inflation risks undermining that and overall economic health.”
She believes steering inflation back to the target of 2 per cent is still set to be its priority, which means a rate rise is “highly likely” to be on the cards this week.
“But given the escalating situation, with fresh sanctions being placed on Russian oil exports, policymakers are expected to limit the rise to 0.25 per cent, which would push the bank rate to 0.75 per cent, to try and dampen demand but not squeeze life out of the economy,” she added.
Adrian Lowery, personal finance expert at investing platform Bestinvest, said the latest gross domestic product (GDP) figures released on Friday “will make it easier for the Bank of England to decide on firm rate rises”.
“With surging inflationary threats in the pipeline from energy and commodities, as well as possible supply chain issues, the [Bank] will have little choice but to raise rates next week at Thursday’s culmination of its monetary policy meeting, with a 0.25 per cent increase to 0.75 per cent looking certain,” he said. “But a bigger rise in bank rate to 1 per cent is also on the cards,” he warned.
The latest GDP data for January showed economic growth sped up as the impact of Omicron was erased before Russia invaded Ukraine weeks later.
GDP increased by 0.8 per cent over the month wiping out the 0.2 per cent drop seen in December, and means that GDP is actually 0.8 per cent above its pre-pandemic level.
Mr Lowery said monthly GDP stats are quite volatile and don’t provide a comprehensive picture of the UK economy and its direction, particularly as the hoped-for strong recovery from the pandemic is likely to be reined in by the conflict in Ukraine that erupted in February.
“But some comfort can be taken from the fact that the economy was recovering strongly and is well above where it was before the pandemic struck. After all, in order to face another crisis, it’s better that the real economy was on the up.”