According to the money markets, the likelihood of the BoE increasing the Bank Rate to 4.5% in May has risen from 82% to 97%. The markets also suggest that there is a good probability that rates will reach 5% by autumn.
The Bank is likely concerned as UK inflation appears to be more persistent than anticipated.
Professor Costas Milas, from the Management School at the University of Liverpool, states that today’s March 2023 CPI inflation reading of 10.1% is not good news for the Bank of England.
He suggests that this reading could provide hints regarding the next interest rate move. It should be noted that the CPI inflation for Q1 2023 was 10.2%, higher than the Bank’s inflation forecast of 9.73%.
"It's not the news that the Bank of England or the prime minister would have wanted" 🇬🇧@bankofengland expected to raise rates in May. The money markets indicate there is a 97% chance that the #BoE lifts Bank Rate to 4.5% in May – up from an 82% chance yesterday. pic.twitter.com/sgwxuYjhup
— Share_Talk ™ (@Share_Talk) April 19, 2023
Therefore, inflation is proving more persistent than what the Bank anticipates, and it is sensible to expect the Bank’s Monetary Policy Committee (MPC) to increase interest rates to 4.5% on May 11th. Furthermore, it is possible that UK interest rates could rise to 4.75% by the end of 2023 due to high public expectations of inflation, currently at 3% two years ahead compared to the Bank’s inflation expectations of less than 1%, which is causing additional pressure on current inflation through the demand for higher wages.
Nonetheless, Professor Milas emphasizes that interest rate forecasts are “far from straightforward,” particularly during periods of elevated financial stress, which we are currently experiencing. He suggests that if financial stress concerns take precedence, UK interest rates may drop below 4% by the end of 2023.
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