Global Courant
A member of the public walks through torrential rain near the Bank of England in May 2023.
Dan Kitwood | Getty Images News | Getty Images
LONDON — The Bank of England is “caught between a rock and a hard place” as it prepares for a major monetary policy decision amid sticky inflation and a tight labor market, economists say.
May’s consumer price index will be released Wednesday morning, the day before the Bank’s Monetary Policy Committee (MPC) announces its next rate hike.
Data since the last meeting point to continued labor market tightness and strong underlying inflationary pressures, alongside mixed but surprisingly resilient growth momentum.
Economists therefore now expect the Bank to extend its tightening cycle and lift interest rates to higher levels than previously expected.
Yield on UK 2-year government bonds rose to a 15-year high of 5% on Monday ahead of the expected announcement of another 25 basis point rate hike on Thursday.
Since November 2021, the central bank has started a series of hikes to take the base rate from 0.1% to 4.5%, and market prices now suggest it could eventually reach 5.75%.
Overall CPI inflation was 8.7% year on year in April, down from 10.1% in March, but core CPI (excluding volatile energy, food, alcohol and tobacco prices) increased by 6 .8% compared to 6.2% the previous month.
The Organization for Economic Co-operation and Development predicted earlier this month that the UK will post annual headline inflation of 6.9% this year, the highest level of any advanced economy.
Adding to the collective headache from policymakers, last week’s labor market data came out much stronger than expected. Unemployment fell against expectations to 3.8%, while the inactivity rate also fell by 0.4 percentage point.
Regular wage growth (excluding bonuses) was 7.2% in the three months to the end of April compared to the previous year, also ahead of consensus forecasts. Regular compensation growth in the private sector, the bank’s main metric, was 7.6% year-over-year.
In terms of economic activity, PMIs fell slightly below consensus in May, but remained in expansionary territory, and UK gross domestic product unexpectedly contracted by 0.3% month-on-month in March before partially recovering with a growth of 0.2% in April.
Forecasts for terminal rates increased
In a research note Thursday, Goldman Sachs Chief European Economist Sven Jari Stehn said that while some uncertainty remains over Wednesday’s CPI release, there is a “high hurdle” for the Bank of England to deem it necessary to step up its hikes. to 50 basis points.
Stehn stressed that “inflation expectations have remained entrenched, recent comments have indicated there is no desire to pick up the pace and the meeting will not have a press conference or new projections.”
“We expect the MPC to stick with its modal estimate that underlying inflationary pressures will ease as headline inflation declines, but acknowledge the firmer recent data and note that risks to the inflation outlook remain significant on the upside. We also expect the MPC to his loose forward guidance unchanged,” added Stehn.
Goldman Sachs expects the MPC to maintain its relatively dovish position given resilient growth, sticky wage pressures and high core inflation, and to be pushed into more 25 basis point increases by stronger-than-expected data, eventually reaching a final rate of 5 to reach .25%. with risks facing upwards.
BNP Paribas economists also expect a 25 basis point increase on Thursday, as inflation expectations remain lower than when the bank hiked rates by 50 basis points last year.
The French lender also raised its final interest rate forecast to 5.5% last week, from 5% previously, in response to “clear evidence of more sustained inflation”.
While the tightening cycle is expected to take longer than higher to reel in inflation, BNP Paribas suggested the MPC would be “wary of tightening too far” and will look at how interest rate hikes will affect households so far, particularly if fixed-rate mortgage extensions will come in in the second and third quarters.
Mortgage borrowers in the UK are being pushed to their limits as rising borrowing costs hit deal extensions and products are taken off the market.
Laith Khalaf, head of investment analysis at AJ Bell, said the MPC is “caught between a rock and a hard place” as it chooses between pushing more mortgage borrowers to the brink and letting inflation run wild.
“Current interest rates reflect the alarm bells ringing in the market, but some moderation in inflationary pressures over the summer would ease the situation. The Bank of England will also be aware that the full force of its tightening has yet to take place to date. always working their way through the economy,” Khalaf said.
That said, if inflation data continues to be ugly, the Bank will be under pressure to take action, and so will the Treasury, if it appears that the Prime Minister’s commitment to cut inflation in half is imminent. to shoot.”
