Will the Bank of England hike interest rates?

The Bank of England is expected to raise key rates by 25 basis points tomorrow to 4.5 percent, which would be a 12th consecutive increase in its ongoing battle against inflation

The Bank is expected to follow in the footsteps of the US Federal Reserve and the European Central Bank, which last week raised their respective banking rates to 5.25 and 3.25 percent.

Thursday, however, could be the last time in this cycle that the Monetary Policy Committee follows the Fed’s direction, with markets expecting the BoE to continue raising rates while its US peers take a break.

UK consumer price inflation stood at 10.1 percent in the 12 months to March 2023, down from 10.4 percent in February, a step in the right direction but well above the BoE’s target of 2 percent.

Meanwhile, the labor market also remains stubbornly tight, with the BoE continuing to voice concerns about the impact of wage increases on underlying inflation.

Katharine Neiss, chief European economist at PGIM Fixed Income, said: “The market is more or less committed to believing that the BoE will follow the Fed and EBC and raise its policy rate by another 25 basis points at its next meeting.”

Neiss added that while the Fed has indicated it will now pause rate hikes and has suggested to the ECB that it should go further, she expects the BoE to be more neutral on next steps.

She said: “A neutral stance would in effect give the BoE some time to see if interest rate hikes so far are enough to cool the economy and bring inflation back to target levels, or if further tightening is still needed. is.’

Fueling expectations of an increase on Thursday, the UK’s economic performance, while weak, is better than expected.

While some fear that further hikes could push the economy into recession, recent data showing stubbornly high inflation and a tight labor market have raised expectations that the BoE will continue to rise at the end of this year.

Swap markets are close to suggesting two more hikes this year, with the potential for base rates to peak at 5 percent before the BoE starts to cut.

Mike Riddell, head of macro unrestricted at Allianz Global Investors, said that while “the US labor market is bursting with cracks”, wage growth in the UK over the past three months has averaged 6.6% year on year, even higher than core inflation in the UK. UK’.

He added: “This poses a real problem for the BoE. If the BoE is correct and the long-term annual productivity growth of the UK economy is now only around 1%, then we think meeting a 2% inflation target would mean UK nominal wage growth less than half of the way it is now, otherwise inflation will continue to rise too high.

‘The BoE [also] cannot point to many signs of a sharp slowdown in growth that would give them confidence that inflation will fall back to target over the next two years.

“The BoE therefore needs to tighten policy further, and we will probably need more than another 25 basis points in this cycle.”

But analysts at ING think the market has mispriced the outlook for UK interest rates, as the BoE’s “recent emphasis on the delayed impact of past tightening suggests the bar for next steps remains high.”

In a report earlier this week, ING said: ‘Unless there is really unwelcome economic news in the coming weeks, we expect a break in June.

‘Since February, the Bank has been warning that interest rate hikes in the past will largely have an effect on the economy. Further tightening, it said, was contingent on signs of “more sustained” inflationary pressures.

It is true that the overall CPI is almost a full percentage point higher than the BoE predicted in February. But… that is solely due to more aggressive increases in food prices, as well as a surprising persistence in core commodity inflation.

Neither trend is likely to be long-lasting, and services inflation, which tends to be much less volatile and more ‘persistent’, is coming in exactly where the BoE had predicted. We think it’s pretty close to a peak.”