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


People walk past the Bank of England in the City of London’s financial district in London, Britain, January 26, 2023.

Henry Nicholls | Reuters

LONDON — The Bank of England is set to raise interest rates for the 12th consecutive meeting on Thursday as inflation continues to climb, but the peak could be closer.

The UK economy has held up better than expected so far this year, although GDP stagnated in February as widespread strikes and a squeezing cost of living hampered activity, while the labor market continues to weaken. seem resilient.

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Headline annual inflation remained stubbornly above double digits in March, driven by still-high food and energy bills, while core inflation also remained unchanged, underscoring the risk of entrenchment. The Bank, however, expects it to decline rapidly from the middle of 2023 to around 4% by the end of the year.

The market almost unanimously expects the Monetary Policy Committee to opt for another 25 basis point hike on Thursday, with a majority of economists expecting a split 7-2 vote to push the rate through discount from 4.25% to 4.5%. However, projections beyond are starting to diverge.

The US Federal Reserve last week hiked another 25 basis points, but dropped what markets interpreted as a tentative indication that its monetary policy tightening cycle is coming to an end.

The European Central Bank slowed its hike cycle last week, opting for a 25 basis point hike that took rates to levels not seen since November 2008, but maintained that “the outlook for inflation continues to weaken. be too high for too long”.

UK inflation could drop to 2.5% in nine to 12 months, says investment services firm

The Bank of England faces a trickier tightrope, however, with the UK expected to be the worst-performing major economy over the next two years and significantly higher inflation than its peers.

Barclays Economists suggested on Friday that the MPC could follow the example of its transatlantic counterpart and that a “new qualifier could signal that the end is in sight”.

The British lender expects a 25 basis point hike in line with data and developments since March, based on a 7-2 split with outsiders Silvana Tenreyro and Swati Dhingra voting to keep rates unchanged.

“We believe the MPC will keep options open in a balanced manner, reiterating that evidence of lingering inflationary pressures may require further tightening, while signaling that it may halt if data is in line with MPR projections,” he said. said the team of chief European economist Silvia Ardagna.

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

Updated forecasts

Along with the rate decision, the MPC will update its forecast on Thursday. Barclays expects a more optimistic growth outlook and a shallower medium-term inflation path than in the February projections, largely due to lower energy prices, additional fiscal support announced in the government’s spring budget and “more resilient household consumption supported by a tighter labor market”.

This updated guidance would allow the Bank not to increase at its June meeting and possibly increase alongside each monetary policy report (MPR) every three months, depending on economic data.

“So while our base case remains for one last ride in June, we see risks that they will skip this meeting and deliver the last ride in August,” Ardagno’s team said.

German Bank Senior Economist Sanjay Raja echoed projections of a 7-2 split in favor of a 25 basis point hike on Thursday, followed by another quarter point in June.

He did not expect any change in forward guidance and suggested that the MPC would reiterate its dependence on data and seek to retain as much flexibility as possible before the next meeting.

The European Central Bank maintained a

Policymakers will wait to see how the tightening of financial conditions last year trickled down to the real economy. The services CPI (consumer price index) and average wage growth will be of particular interest to the MPC, Raja suggested.

“Risks are skewed towards a more dovish pivot, with the MPC placing more weight on delays in the transmission of monetary policy. Implicitly, this could indicate a preference for potential upsides at MPR meetings, giving the MPC more leverage. time to assess the incoming data,” Raja said. said.

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

Raja suggested that the most interesting aspect of Thursday’s report for the market will be any perceived change in the MPC’s confidence in its outlook, which will give the clearest indication as to whether policymakers think they can. bring inflation back to its 2% target over two and three-year horizons.

The risk of a dovish tilt in Bank of England guidance has also been flagged by economists at BNP Paribas, who believe Thursday will mark the end of the Bank’s tightening cycle.

“We don’t think the MPC will signal as such, with forward guidance likely to remain quite vague on the future policy path. further increases, in our view,” BNP chief economist for Europe Paul Hollingsworth and his team said in a note on Friday.

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