BoE Preview: to continue to hike in 25 bps steps

The Bank of England (BoE) will release its monetary policy decision on Thursday at 11:00 GMT. Along with the decision, the meeting minutes and the Monetary Policy Report will be made public. Following the announcement, Governor Andrew Bailey of the Bank of England will attend a news conference at 11:30 GMT to offer more details and answer questions.

A 25 basis point increase from 4.25% to 4.50% is generally forecast. The Monetary Policy Committee (MPC) is divided, with external members Silvana Tenreyro and Swati Dhingra opposing additional rate rises. They are anticipated to vote against more restrictions. The remaining seven members are thought to favour rate increases. This would be the case if certain members joined the “no change” team.

The Bank of England hiked the benchmark interest rate by 25 basis points during its March meeting. “If there is evidence of more persistent pressures, further tightening of monetary policy will be required,” the Bank of England stated in its policy statement. The Pound’s reaction was modest. GBP/USD was trading at 1.2300 at the time, while EUR/GBP was around 0.8850.

The UK Consumer Price Index increased by 10.1% year on year in March, while the Core CPI increased by 6.2%. Inflation has been sluggish to decline, but the economy has shown to be robust. This situation clears the door for further tightening. However, what happens following the May meeting of the Monetary Policy Committee (MPC) is unknown. If April’s inflation slows significantly, along with unfavourable economic data, it might lead to a potential delay in tightening. Furthermore, the impending UK GDP data, which is set to be released on Friday at 6:00 GMT, will be crucial.

MPC members will offer revised predictions that will have an impact on the interest rate market, helping to shape the direction of the Pound. If inflation predictions are revised upward, expectations for more rate rises and a higher terminal rate will rise.

Market participants do not expect substantial changes in forward guidance. The BoE cannot take an overtly hawkish position with two members voting against rate rises.

“The MPC hikes 25 bps and leaves guidance essentially unchanged, though the language around financial and banking sector instability might be a bit softer. In doing this, the MPC essentially leaves another 25 bps hike in June on the table. The vote is likely 6/3 for 25/0, with Cunliffe joining Dhingra and Tenreyro in voting for a hold. Inflation projections will probably be tweaked slightly, though this should have limited policy implications given the substantial uncertainty bands around the projections. GBP/USD -0.15%”

As the Bank of England (BoE) inspired “Super Thursday” kicks in, Goldman Sachs (GS) unveils its monetary policy forecasts for the “Old Lady”, as it is informally known.

Key predictions

While it is possible that the monetary policy committee might want to slow the hiking to a quarterly pace after the May meeting, we remain skeptical that this will be feasible amid ongoing inflationary pressures.

We therefore expect the monetary policy committee to continue to hike in 25 basis point steps until reaching a terminal rate of 5% in August.

We expect that the Bank will only start to reduce rates from 2024 Q2 given resilient growth momentum.

UK inflation on track to fall rapidly, helped by cooling global energy prices (but) was unlikely to drop enough to meet the BoE’s 2% target.