The Bank of England is expected to hike the interest rate soon to combat the rising inflation due to the Russia-Ukraine war. However, economic fallout is learned to be forcing the bank to change course and pause the rate increase.
The BoE has lately gestured to be gradually increasing the interest rates over the next year and the forecast of inflation is 7.5 percent by the spring.
Meanwhile, the war has raised energy prices and this has led to a rise in the inflation. It is feared the economy may be struck by stagflation.
The United States Federal Reserve has increased the key interest rate lately and for the first time in the period of about four years to combat against 40-year high inflation.
If BoE hikes the interest rates, the borrowing cost may increase and this may lead to further increase in the cost of living. This may worsen the growth slowdown.
According to BlackRock Investment Institute, the Russia-Ukraine tension is increasing inflation and reducing global growth. The major shock is the rising energy costs due to disruption in supply in the eurozone.
Any attempt to contain inflation may turn up costly and the growth shock cannot be cushioned. Europe may face a stagflationary shock. European Central Bank may boost inflation predictions while downgrade growth forecasts, but the United States may remain cushioned.
It added that the BoE may increase the interest rates, but high inflation and low growth may mean less room to handle the rising prices. Aggressiveness may cost high to both employment and growth.
It is important to understand that central banks need to live with inflation and it would be tough to witness the authorities emerge to rescue in the inflationary environment.
Meanwhile, YOU Asset Management CEO Derrick Dunne said labor shortage may become a significant issue and this may further fuel inflation while employees demand a wage rise.
Dunne stated the BoE needs to be conscious while making a plan and avoid getting into a vicious cycle with increased wage growth and thereafter increased inflation. The challenges are many and the choice between inflation and economy is unpalatable.
Meanwhile, Ukraine has refused to accept the Russian ultimatums to wrap up the war and the European Union has split over oil sanctions imposed on Russia.
The war has entered into the fourth week. The Western allies have imposed a ban on the import of Russian oil and gas. Simultaneously, the Russian banks have been removed from the international SWIFT payment systems.