Market Insight – Bank of England

The Bank of England are set to meet this week as UK borrowing costs are now at fresh highs not seen since 2008, as the central bank continues to battle double-digit inflation.

Currently financial markets are pricing almost six more rate hikes from here, and while we doubt the Bank of England would endorse that. It is noteworthy that the central bank may want to push back heavily either given the recent tendency for inflation data to come in above expectations.

Most economists expect a 25 basis-point rate hike this week and only vague guidance on what’s likely to come next. The UK CPI inflation report released this week probably won’t influence this week’s decision, but probably the July decision.

In the previous meeting The Bank of England raised the bank rate by 25 basis points to 4.5% in May 2023, marking the twelfth consecutive rate increase, in line with market expectations.

The central bank say inflation falling to 5.1% in Q4 2023, compared to 3.9% in the February forecast and to meet the 2% target by late 2024. The economy is seen stalling in Q1 and Q2, but to rise 0.25% in 2023, compared to a 0.5% contraction seen in February.

Government budget measures outlined in March are expected to add 0.5% to GDP, above the 0.3% seen in February. Policymakers added that will continue to monitor closely indications of persistent inflationary pressures.

It should be that the tightness of labour market conditions and the behaviour of wage growth and services price inflation are always closely observed by policymakers.

The Bank of England also clearly stated that if there were to be evidence of more persistent inflationary pressures, then further tightening in monetary policy would be required.

25 basis-point rate hike, most likely backed by seven committee members, with members Silvana Tenreyro and Swati Dhingra voting for no change. A further 25 basis point hike in July and August is likely.