The Bank of England is preparing a big rate hike to control inflation

The US Federal Reserve has already begun to scale back its response, raising interest rates by just a quarter point on Wednesday. Meanwhile, the European Central Bank is expected to grow again, with a half-point gain on Thursday. Optimism mounted that rate hikes might be easing after US inflation fell to 10 for the second straight month.5% in December, down from the 11.1% peak  in October. It's still much higher than in the US and the 20 eurozone countries, where inflation slowed to 6.5% and 8% in December.5% in January. 

With food and service costs soaring and wage increases beating forecasts, most economists are hoping the Bank of England's Monetary Policy Committee (MPC) will send the message that the fight against inflation is serious. But it's likely to be tight, as some economists suspect the bank may opt to raise its interest rate by a quarter-point if energy prices fall and concerns about sluggish economic growth mount. Interest rate hike to 4% in February, likely the last 'heavy' hike in the tightening cycle," said Sanjay Raja, chief economist at U. Deutsche Bank, in a note to clients.But "with inflation well past its peak and forward-looking data continuing to point to  sluggish growth and easing price pressures, the MPC may decide to slow rate hikes sooner rather than later." 

After more than a decade of record-low interest rates The Bank of England began raising funding costs in December 2021 when its benchmark interest rate was just 0.1%. The bank intensified its fight against inflation over the past year, approving four large hikes of half a point or more since August to take the to 3.5%.Inflation spiked after Russia's invasion of Ukraine, causing food and energy prices  to spike, causing the largest drop in US living standards since the 1950s. 

This has sparked a wave of strikes, including the largest industrial dispute. in more than a decade on Wednesday, as nurses, machinists, border guards and teachers demand pay rises. The government is trying to prevent higher wages from triggering a second round of domestically driven inflation that could be harder to control. 

Rising prices are also stifling economic growth and straining public finances as the government spends billions to help consumers and businesses hit by soaring energy costs this winter. The International Monetary Fund said this week  that the US is the only major economy to shrink this year, even as prospects for the rest of the world are improving. 

The IMF said  the country's gross domestic product is likely to shrink by 0.6% in 2023, compared to a previous forecast of 0.3% growth. The Bank of England is due to release its own updated economic forecasts on Thursday, with economists hoping for a rosier picture than the IMF if energy prices stabilise. August, which will translate into lower costs for businesses and consumers in the coming months. Martin Beck, chief economic adviser at economic forecasting group  EY Item Club, said  the central bank's November forecast of a record   two-year recession now looks too "dejected", meaning inflation will fall faster and the economy less in recent months and for less time than the Bank of England expected three months ago,” he said.