BoE Preview: 50 bps hike?

The Bank of England (BoE) is likely to return to its conservative stance in the final meeting of this year, having delivered its biggest rate hike in 33 years in November. The BoE will announce its interest rate decision at 12:00 GMT this Thursday, accompanied by the Minutes of the meeting.

With the United Kingdom’s annual inflation rate at a 41-year high of 11.1% in October and a prolonged economic recession forecasted by the BoE, a 50 bps rate hike may not come as a surprise.

We expect the Bank to return to its more dovish tone as recession risks are becoming more clearer and the growth outlook is increasingly becoming weaker. This was highlighted by the latest projections, which described a very challenging outlook for the UK economy, where it now expects the UK “to be in a recession for a prolonged period.” The BoE’s November Decision Maker Panel also shows that broad inflation expectations dropped with participants expecting CPI inflation to be 7.2% one year ahead, down from 7.6% in the October survey. Additionally, the BoE tends to ear on the side of caution, why we expect the return to a 50bp hike.

As we get closer to the release time, here are the expectations forecast by the economists and researchers of 5 major banks.

TDS

“We look for a 50 bps hike at this meeting, pushing Bank Rate to 3.50%, with a likely 7-2 vote in favour (Tenreyro and Dhingra are likely to vote for smaller 25 bps hikes, or possibly even for no hike at all; there’s a risk Mann votes for 75 bps too). From here, we look for another 50 bps hike in February, and a final 25 bps hike in March, taking Bank Rate to a terminal rate of 4.25%. We expect the MPC to then hold Bank Rate at that level for nearly one year, with the first cut coming in early 2024. We expect QT policy to continue on its current trajectory through 2023 and beyond.”

Wells Fargo

“We expect the BoE to slow the pace of its rate increase and anticipate a 50 bps hike to 3.50%. Indeed, we see only one further 25 bps hike in early 2023, and a peak policy rate of 3.75% for the current cycle.”

ING

“Despite higher-than-expected inflation in October, we expect the BoE to revert to a 50 bps hike at its December meeting. Gilts are back to pre-budget crisis levels. They should outperform Bunds but not Treasuries. Sterling has recovered strongly but will struggle to make further gains in a challenging investment environment.”

Rabobank

“We expect the BoE to cap off a tumultuous year with a 50 bps rate increase. That would lift the Bank rate to 3.50%. Two MPC members may favour a smaller rise. We see the central bank continuing to raise rates to 4.75% in the first half of 2023, as spot inflation remains high and the labour market continues to be ‘too’ tight. Central bank tightening will deepen and extend the recession that has already started. We forecast a contraction of -1.1% in 2023 and see no growth in 2024.”

Danske Bank

“We expect the BoE to revert to a more dovish stance and join the club of 50 bps hikes. We still expect the Bank Rate to peak at 3.75% in February 2023. A slightly dovish BoE and a hawkish ECB should send EUR/GBP higher during the day.”