Global Courant 2023-05-10 10:59:52
People walk outside the Bank of England in the City of London financial district, in London, Great Britain, January 26, 2023.
Henry Nichols | Reuters
LONDON — The Bank of England is expected to raise rates for its 12th consecutive meeting on Thursday as inflation escalates, but the top may be closing in.
The UK economy has held up better than expected so far this year, although GDP remained flat in February as widespread strikes and cost-of-living pressures hampered activity, while the labor market looks resilient.
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Annual headline inflation remained stubbornly above 10% in March, driven by persistently high food and energy bills, while core inflation also remained unchanged, highlighting the risk of entrenchment. However, the Bank expects it to fall rapidly from mid-2023 to around 4% by the end of the year.
The market almost unanimously expects the Monetary Policy Committee to vote for another 25 basis points on Thursday, with a majority of economists expecting a 7-2 split vote to take bank rates from 4.25% to 4.5%. However, projections beyond that are beginning to diverge.
The US Federal Reserve hiked another 25 basis points last week, but dropped what markets interpreted as a tentative hint that the cycle of monetary policy tightening is coming to an end.
The European Central Bank slowed its hiking cycle last week, opting for a 25 basis point hike that lifted interest rates to levels not seen since November 2008, but claimed that the “inflation outlook will remain too high for too long”.
The Bank of England faces a trickier tightrope, however, as the UK is tipped as the worst-performing major economy over the next two years and inflation rates significantly higher than peer companies.
Barclays economists suggested on Friday that the MPC could follow its transatlantic counterpart’s lead and that a “new qualification could signal that the end is in sight.”
The UK lender expects a 25 basis point increase in line with data and developments since March, based on a 7-2 split with outside members Silvana Tenreyro and Swati Dhingra voting to hold rates.
“We think the MPC will keep options open in a balanced way, reiterating that evidence of continued inflationary pressures could warrant further tightening, while indicating it could pause if data is in line with MPR projections,” it said. team of chief economist Silvia Ardagna.
“All this, and updated projections, should be consistent with our call for a final 25 basis point hike at the June meeting to a final rate of 4.75%.”
Updated Forecasts
In addition to the rate decision, the MPC will update its forecasts on Thursday. Barclays expects more optimistic growth prospects and a shallower medium-term inflation path than in the February projections, largely due to lower energy prices, additional fiscal support announced in the government’s spring budget and “more resilient household consumption supported by a tighter labor market”.
This updated guidance would allow the Bank to skip walking at its June meeting and potentially move to walking every three months alongside each monetary policy (MPR) report, depending on economic data.
“So while our base case remains for a final hike in June, we see the risk of them skipping this meeting and delivering the final hike in August,” Ardagno’s team said.
German Bank Senior economist Sanjay Raja reiterated projections for a 7-2 split in favor of a 25 basis point increase on Thursday, followed by another quarter point in June.
He expects no changes in forward guidance, and suggested that the MPC reiterate its data reliance and try to maintain as much flexibility as possible ahead of its next meeting.
Policymakers will have to wait and see how their tightening of financial conditions over the past year has an impact on the real economy. Services CPI (consumer price index) and average wage growth will be of particular interest to the MPC, Raja suggested.
“Risks tend towards a more lenient pivot, with the MPC more responsive to the delays in monetary policy transmission. Implicitly, this could indicate a preference for potential hikes during MPR meetings, giving the MPC more time to process incoming assess data,” Raja said.
The central bank forecast in February that consumer price index (CPI) inflation will fall from the annual 10.1% recorded in March to just 1.5% in the fourth quarter of 2024.
Raja suggested that the most interesting aspect of Thursday’s report for the market will be any perceived change in the MPC’s confidence in its outlook, which will provide the clearest indication of whether policymakers believe they can get inflation back to target. 2% over two and three year horizons.
The risk of an easing in Bank of England guidance was also signaled by BNP Paribas economists, who believe Thursday will prove to be the end of the Bank’s tightening cycle.
“We don’t think the MPC will send a signal as such, as forward guidance is likely to remain quite vague on the future policy path. Look,” BNP Chief Europe Economist Paul Hollingsworth and his team said in a note Friday.
