Increased Trading Indicates Higher Confidence in 0.5 Point Interest Rate Increase

On this eventful day for the markets, government borrowing costs have surged as economists express concern that the Bank of England might need to bring Britain into a recession in order to regain control over inflation.

The yield on two-year gilts, which represents the return promised by the Treasury when borrowing money, briefly reached a 15-year high at 5.09% following data showing that underlying inflation reached its highest level in 31 years last month.

The overall consumer prices index remained steady at 8.7%, while core inflation (which excludes volatile food and energy prices) rose to 7.2% in May, based on data from the Office for National Statistics.

Karen Ward, an advisor to Chancellor Jeremy Hunt and former Bank of England rate setter at JP Morgan, stated that inflation may persist unless the economy weakens.

She highlighted the presence of “certain signs” in the economy indicating a price-wage spiral, where companies raise prices, leading to demands for higher wages by workers, which in turn prompts companies to raise prices further.

During an interview on BBC Radio 4’s Today programme, Ms. Ward explained, “The difficulty for the Bank of England – no one envies them their job at the moment – is that they have to create a recession. They have to generate uncertainty and fragility because it is only when companies are uncertain about the future that they are willing to hold off on price increases, and when workers are less confident about their jobs, they are less likely to demand higher pay.”

Stuart Cole, the Chief Macro Economist at Equiti Capital in London, commented, “It is becoming increasingly likely that a recession will be necessary to finally tame the inflation genie.”