LONDON: The Bank of England will consider whether to push through the biggest interest-rate increase in 33 years to respond to surging inflation and weakening confidence in British assets.

With prices rising five times faster than the UK central bank’s 2% target and the pound falling almost daily, policy makers led by governor Andrew Bailey are under pressure to step up the pace of monetary tightening.

Prime Minister Liz Truss’s move to protect households from rising energy bills will add a jolt of stimulus to the economy, softening the downturn that analysts and the BoE had been expecting.

The US Federal Reserve is likely to push its key rate further past lending costs in the UK, potentially further weakening sterling.

“The arguments for a 75 basis points (bps) move are more compelling than those for a 50 bps increase,” Paul Hollingsworth, chief European economist at BNP Paribas, wrote in a note to clients.

“A 75 bps increase remains possible, but we think the government’s emergency energy support package reduces the need to up the hiking pace by ensuring a lower inflation peak and a faster decline next year,” said Dan Hanson, a Bloomberg economist.

The majority of the 47 economists surveyed by Bloomberg expect the BoE to raise its benchmark lending rate a half-percentage point to 2.25% on Sept 22.

Investors last Friday were pricing in just over a 50% chance of a three-quarter-point increase, reining in those bets from a peak of 80% several times in the past few weeks.

Complicating this month’s decision are the politics of the BoE’s nine-member Monetary Policy Committee and Bailey’s aim to start selling off more of the £895bil of assets the bank built up stimulating the economy since the global financial crisis more than a decade ago.

Michael Saunders, one of the most hawkish members of the panel, stepped down last month and was replaced by Swati Dhingra, whose views on rates aren’t well known.

The BoE had planned to endorse so-called quantitative tightening, where bonds from the asset portfolio will be sold, but Truss’s decision to borrow huge sums to head off a winter spike in energy costs has introduced an element of doubt.

“Questions have been raised whether this is the opportune moment to sell gilts back into the market,” said Ellie Henderson, an economist at Investec.

The 50 bps increase delivered by the BoE in August was the largest since early 1995 - two years before the Treasury handed the BoE authority to set monetary policy.

A 75 bps increase would be the biggest since 1989, when inflation was climbing rapidly following a consumer boom.

Bigger rate rises were announced during a brief and unsuccessful attempt to bolster sterling during the 1992 exchange rate crisis, but they were unwound within a day.

Last Friday, sterling marked the 30th anniversary of “Black Wednesday” - Sept 16, 1992 - by falling below US$1.14 for the first time since 1985.

UK government bonds have also underperformed peers recently, with 10-year yields climbing as high as 3.22% last week, the highest in more than a decade.

This month’s meeting for the BoE, delayed a week by the death of Queen Elizabeth II, has split the debate among economists and policy makers about how to respond to conflicting forces buffeting the UK economy.

Inflation is forecast to rise further and companies are struggling to find the employees they need to fill open jobs, pushing up wages and providing a constraint on how quickly they can grow.

 - Bloomberg