Anticipation of a spike in the Bank of England’s interest rate has soared in response to undesirable inflation and wage growth data, despite economists’ assertions that such market forecasts are incorrect.
The inflation statistics released today demonstrated that the headline consumer price index (CPI) increased by 8.7% in May compared to the same month last year, a rate that remained the same as the preceding month. This contradicts the Bank’s monetary policy committee (MPC) and City economists’ expectations, which projected a decrease to 8.3% and 8.4%, respectively.
Meanwhile, core CPI, excluding typically volatile elements such as food and fuel, climbed to its highest level in 31 years, at 7.1%.
Following a quarter-percentage point increase during the May meeting, the UK base rate currently stands at 4.5%.
In light of this data, markets and several economists are now considering a substantial likelihood of a 50 basis point (bps) rise by the Bank of England to 5.0% tomorrow. Previously, a more modest increase of 25bps to 4.75% was anticipated.
If realized, this hike to 5% would represent the highest interest rate since the beginning of 2008.
Current market sentiment indicates approximately a 60% probability that rates will climb to a near 6% peak by this winter, with the first interest rate reduction expected to occur in the summer of next year, likely in June.
The chief executive at Saxo Capital Markets UK, Charles White Thomson, expressed: “Inflation, particularly when it gains momentum, can be an elusive, cunning, and formidable adversary, as we’re currently experiencing.
“There exists a compelling case for a 50-basis point increase at tomorrow’s Bank of England meeting.
“The Bank must act swiftly and decisively. The danger of further policy mishaps is tangible and the implications are becoming increasingly significant.”
