The Bank of England is expected to raise interest rates for the 12th consecutive meeting on Thursday due to high inflation. However, it seems that the summit may be approaching its end.
So far this year, the U.K. economy has performed better than anticipated. However, in February, GDP stagnated as strikes and the squeeze on living costs hindered economic activity. Despite this, the labor market continues to show resilience.
March saw annual headline inflation remain persistently above 10%, driven by elevated food and energy expenses. Additionally, core inflation remained unchanged, indicating the risk of entrenchment.
The Bank expects it to fall rapidly from the middle of 2023 to reach around 4% by the end of the year, however.
Monetary Policy Committee
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 7-2 split vote to take the Bank Rate from 4.25% to 4.5%. However, projections beyond that begin to diverge.
The U.S. Federal Reserve last week implemented another 25 basis point hike but dropped what the markets interpreted as a tentative hint that its cycle of monetary policy tightening is drawing to a close.
The European Central Bank last week slowed its hiking cycle, opting for a 25 basis point increment that lifted rates to levels not seen since November 2008, but contended that the “inflation outlook continues to be too high for too long.”
The Bank of England faces a trickier tightrope, though, with the U.K. tipped to be the worst-performing major economy over the next two years and inflation considerably higher than peers.
Barclays economists on Friday suggested that the MPC may follow the lead of its transatlantic counterpart and that a “new qualifier might signal that the end is in sight.”
The British lender expects a 25 basis point hike consistent with data and developments since March, based on a 7-2 split with external members Silvana Tenreyro and Swati Dhingra voting to keep rates on hold.
“We think the MPC will keep options open in a balanced manner, reiterating that evidence of persistent inflationary pressures could require further tightening, while signalling that it might pause if data comes in line with MPR projections,” Chief European Economist Silvia Ardagna’s team said.
“All this, and updated projections, should be consistent with our call for a final 25bp hike at the June meeting to a terminal rate of 4.75%.”
