Bank of England likely to hike, all eyes on the BOE this Thursday

The Bank of England’s governor, Andrew Bailey, along with the Monetary Policy Committee (MPC) members, is expected to announce another interest rate hike this coming Thursday. There is ongoing debate about whether this will be the last increase in the current cycle.

Market predictions suggest a quarter-point rate increase, which would bring the headline base rate up to 4.5%. A divided vote among the committee is also anticipated, following a 7-2 split at the previous meeting in March.

Although the MPC is aware of the potential negative effects of higher interest rates on the economy and has expressed diminishing enthusiasm for further hikes, its primary focus remains reducing inflation, which currently exceeds 10% but should ideally be around 2%.

Despite the US Federal Reserve’s recent indication that it may pause rate changes for now, market predictions include two more 0.25% increases by the MPC in August and September, taking the base rate to a peak of 5%. Based on current rate swaps, Bailey and his team are expected to partially reverse these hikes, with 0.25% rate cuts anticipated in February and March 2023.

UBS economist Anna Titareva notes that despite a more balanced and dovish tone from the MPC in March, recent data have not alleviated the committee’s concerns about persistent inflation. Rabobank macro strategist Stefan Koopman predicts an upward revision of growth and inflation projections by the Bank of England staff, with a peak rate of 4.75% later this year.

Koopman explains that the economy must slow down for firms to lower prices and workers to accept reduced wages. However, the economy is currently accelerating rather than slowing. Future interest rate decisions will be closely scrutinized at the upcoming meeting, as Titareva points out.

Although her baseline prediction does not include further hikes after May, Titareva acknowledges a significant risk of at least one more 25 basis-point hikes on June 22. She notes several key data releases before the June meeting, such as labour market, inflation, and various survey indicators, and expects the MPC to emphasize that future moves will be data-dependent.

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