BoE Preview: hikes to continue until inflation improves

Markets are awaiting today, Thursday, the Bank of England interest rate decision, amid expectations that it will raise rates for the fifth time in a row since last December, which represents the largest rate hike in 25 years and is expected to continue with inflation heading towards recording double digits.

BOE Governor Andrew Bailey is scheduled to hold a press conference following the publication of the Monetary Policy Report (MPR) at 11:30 GMT.

Markets have priced in a 25 bps lift-off, predicting the bank rate to rise to 1.5% by early 2023. Heading into another rate hike this week, the outlook for the UK economy continues to be dour while the central bank remains committed to tackling the inflation monster.

investors are betting that the Bank of England’s Monetary Policy Committee will double the interest rate to 2% by September and 3% by March next year.

Bailey and Co. are in a tough spot yet again, as the inflation rate holds at a 30-year high of 7% in March, driven by a sharp increase in petrol and diesel costs.

Until a day ago, a 50 bps rate hike by the UK central bank could not be imagined. With the US Federal Reserve (Fed), however, now seen delivering a 75 bps rate hike at its June policy meeting, seeing the BOE going large on the rate lift-off is not unthinkable.

Adding to this, the Reserve Bank of Australia (RBA) announced a bigger-than-expected 50 bps hike earlier this month and the Reserve Bank of New Zealand (RBNZ) also hiked by a half-point. Markets have priced in a roughly 40% chance of a double-dose lift-off at the June MPC meeting.

According to the Bloomberg survey of economists, three of the BOE’s nine officials are expected to vote for a 50 bps hike, with the majority backing a 25 basis point move. Meanwhile, the latest Reuters poll of economists showed that the BOE is set to deliver a quarter-point hike on June 16 to 1.25%, its fifth consecutive rate rise. Two more are expected this year to 1.75%, which means rate increases in August and November.

Unlike the Fed, the BoE has adopted a careful approach over its tightening era, expressing unease particularly about faster rate increases even though inflation hit a new three-decade high of 7.0% y/y in March and could run even higher later in the year according to the BoE’s previous projections. Policymakers are probably keen to avoid exacerbating inflation expectations through a quick stimulus reduction as the series of higher highs in bond yields show no signs of abating, with the 10-year yield topping recently at a seven-year high marginally above 2.0%. The higher the yields rise, the larger borrowing costs become for businesses, and therefore, the bigger the risk of an economic slowdown.

Forecasts from nine major banks

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

Wells Fargo

“We expect the MPC to hike rates by 25 bps with another 25 bps increment at its next policy meeting on August 4. We look for another 50 bps of tightening this autumn and early next year, which would take the Bank Rate to 2.00%. We do not expect the MPC to tighten as much as current market pricing indicates – the market is currently priced for a Bank Rate of nearly 3.00% by next May – due to the downside risks that significant monetary tightening poses to the economy. Real income is being eroded rapidly by high inflation, and the combination of potential retrenchment in consumer spending and significant monetary tightening could cause economic activity to crater.”

TDS

“We expect the MPC to announce a 25 bps hike in Bank Rate. Guidance is likely to be left broadly unchanged but multiple votes for a 50 bps hike imply a hawkish shift. We now expect sequential 25 bps hikes through the end of 2022, with Bank Rate reaching 2.25% by year-end.”

Danske Bank

“We expect the BoE to hike the Bank Rate by another 25 bps to 1.25% but simultaneously still sending slightly mixed signals by repeating that ‘some degree of further tightening in monetary policy may still be appropriate in the coming months’.”

UOB

“Previously, we had held a cautious view of the BoE pausing once the policy rate reaches 1.00%. However, the last voting outcome by the MPC has turned out a little less dovish than our expectations, and we thus now look for another 25 bps hike in June. As for asset sales, we will likely have to wait until at least then for some guidance, though we expect sales to begin in 4Q22 at GBP5 bn a month.”