Bank of England set for 12th straight interest rate hike, but the outlook remains murky

LONDON–The Bank of England is expected to raise rates at its 12th consecutive meeting on Thursday as inflation continues to rise, but a summit could be nearing.

The UK economy has held up better than expected so far this year as the labor market continues to show resilience, although February GDP held flat as activity was hampered by widespread strikes and cost of living pressure. ing.

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The annual headline inflation rate remained stubbornly above 10% in March on the back of persistently high food and utility costs, while core inflation remained unchanged, highlighting the risk of a fixation. But the central bank expects it to fall sharply from mid-2023, reaching around 4% by the end of the year.

The market was almost unanimous in expecting the monetary policy committee to pick another 25 basis point rate hike on Thursday, with a majority of economists voting 7-2 for the central bank rate from 4.25% to 4.5%. We expect it to drop to 10%. Beyond that, however, predictions begin to diverge.

The U.S. Federal Reserve hiked rates by another 25 basis points last week, but withdrew what markets interpreted as a tentative hint that the tightening cycle was coming to an end. .

The European Central Bank last week chose to slow its rate hike cycle, raising interest rates by 25 basis points to levels not seen since November 2008, but argued that “the inflation outlook will remain too high for too long.” .

But with the UK set to be the worst performing major economy over the next two years, with much higher inflation than most, the Bank of England faces a tougher tightrope walk.

barclays Economists on Friday suggested that the MPC could follow its transatlantic counterpart and that “new qualifiers may signal the end is in sight”.

UK financial institutions have fallen by 25 basis points, consistent with data and developments since March, based on external committee members Silvana Tenreiro and Swati Dingula voting to keep rates on hold, split 7-2. Expect a rate hike.

Chief European economist Silvia Ardaña’s team said: “We believe the MPC will leave options in a balanced fashion, and evidence of persistent inflationary pressures may call for further tightening. “While re-emphasizing, it also suggested a possible policy moratorium if the data matched MPR’s projections.”

“All of this and the latest projections should be consistent with our call for a final 25 basis point hike to a final rate of 4.75% at the June meeting,” he said.

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The MPC will update its forecasts on Thursday following the interest rate decision. Barclays sees a brighter growth outlook than expected in February, largely due to lower energy prices, additional fiscal support announced in the government’s spring budget and “resilience in household consumption underpinned by a tightening labor market”. A moderate medium-term inflation path is expected.

The latest guidance could cause the central bank to skip rate hikes at its June meeting and shift to a rate hike in line with the tri-monthly Monetary Policy Report (MPR), depending on economic data.

“So our base case is still the final rate hike in June, but we see the risk of skipping this meeting and implementing the final rate hike in August,” Aldagno’s team said.

Deutsche Bank Senior economist Sanjay Raja also echoed expectations of a 25-basis-point rate hike on Thursday, followed by another quarter-point hike in June.

He expected forward guidance to remain unchanged, suggesting the MPC would reiterate its data dependency and try to remain as flexible as possible ahead of its next meeting.

Policymakers will see how the tightening monetary policy of the past year translates into the real economy. Raja suggested services CPI (consumer price index) and average wage growth would be of particular interest to the MPC.

“Risks are skewed in a more dovish direction, with the MPC putting a lot of equity into delayed transmission of monetary policy. The MPC could have more time to evaluate future data,” Rajah said. He said.

In February, the central bank forecast that consumer price index (CPI) inflation would fall to just 1.5% in the fourth quarter of 2024 from an annualized rate of 10.1% recorded in March.

Raja said the most interesting part of Thursday’s market report would be to see some shift in confidence in the MPC’s outlook, which could allow policymakers to push inflation back to the 2% target above 2%. He suggested that it would be the clearest indicator of whether or not he believes that 3 year vision.

Economists at BNP Paribas have also warned of the risk that the Bank of England’s guidance will be dovish, with Thursday marking the end of the Bank of England’s tightening cycle.

“Forward guidance is likely to remain appropriately vague about future policy directions, and we do not believe the MPC will send such a signal. Considering , the risks appear skewed towards a dovish turn,” BNP chief European economist Paul Hollingsworth and his team said in a note on Friday.