MercoPress. South Atlantic News Agency

US Fed and UK BoE expected to hike interest rates this week, but how far?

Fed's chief Powell and the rest of the rate setting committee, are expected to lift borrowing costs 75 basis points for the third time in a row on Wednesday.

The United States Federal Reserve and the Bank of England this week are scheduled to hike interest rates steeply again in a bid to tame inflation. The two central banks are expected to look through recession fears and continue their fight against extraordinary price rises.

Despite inflation dropping to 8.3%, analysts have warned price pressures are starting to embed in the US economy, likely forcing Federal Reserve chief Jerome Powell and the rest of the rate setting committee, FOMC, to lift borrowing costs 75 basis points for the third time in a row on Wednesday.

Experts at Wall Street investment bank Goldman Sachs are backing such a move by the Fed, taking rates to 2.75% and 3%. But, the world’s most influential central bank is not expected to stop there.

“We expect 50 basis hikes in November and December, taking the funds rate to 4-4.25% at year end,” they said in a note to clients over the weekend.

Figures published last week revealed core inflation is still running hot, coming in at 6,3% last month, higher than Wall Street’s forecasts.

Analysts are worried that inflation, up until recently driven by international factors that the Fed cannot influence, is fuelled by high wage growth and domestic services businesses passing on higher costs to consumers through higher prices until recently.

Similar dynamics are playing out in the United Kingdom. Inflation dropped from a 40-year high of 10.1% to 9.9% in August. However, core inflation also surprised to the upside, while the rate of price rises for services hit a 30-year high.

UK inflation dropped for the first time in nearly a year in August, reported the Office for National Statistics, (ONS)

Markets expect Bank governor Andrew Bailey and co to lift borrowing costs 50 basis points to 2.25%, but are betting on an outside chance of a 75 basis point move, which would be the biggest in the monetary authority’s 25 years of independence.

A steeper move would stem the pound’s slide against the US dollar and offset inflationary pressure driven by the government’s cost of living support package, “shoring up the Bank’s inflation fighting credibility,” Sanjay Raja, senior economist at Deutsche Bank, said.