The Bank of England is set to leave a choice on whether UK rates will peak at 4.25% or 4.5% after 10 straight rate hikes later this week.
The BoE is also expected to suggest that interest rates will need to remain high for some time after interest rates have peaked to ensure a break with high inflation.
The bank’s Monetary Policy Committee is expected to raise interest rates by half a percentage point to 4% at noon on Thursday, according to the majority of economists surveyed by Reuters.
A rate hike is almost universally expected, but there is not much consensus on how much work the BoE needs to do afterwards to cool the economy sufficiently to keep inflation down.
Last week, BoE Governor Andrew Bailey said the path to lower inflation was “easier” than previously thought, and that with wholesale gas prices falling, the economy needed to curb price increases. He said the depth of recession was limited.
But he categorically refused to say that the financial markets’ expectations of UK interest rates peaking at 4.5% were wrong.
He noted that the December MPC did not indicate that the market was “not in line” with the BoE’s thinking, as it did in November, when the market expected a much higher peak rate of 5.25%. bottom.
Inflation stood at 10.5% in December after receding from a 41-year peak in October.
Economists are divided over how high UK interest rates need to end up.
Karen Ward, chief European markets strategist at JPMorgan Asset Management, said she expects rates to rise to 4.5%.
“Britain activity has clearly slowed, but we are not yet convinced that it will be enough to reduce potential inflationary pressures,” Ward said. “It suggests that labor market momentum is improving rather than deteriorating,” she added.
In contrast, Jagjit Chadha, director of the National Institute of Economic and Social Research, said neither the MPC nor economists adequately understood the implications of raising interest rates rapidly from near zero to the current 3.5%. .
“The danger is going too fast,” he said.
The BoE will begin raising rates in December 2021, and has since hiked rates by at least half a percentage point at every meeting since August last year.
Financial markets and most economists believe the MPC majority will opt for another ‘strong’ rate hike of 0.5% to match December’s rate hike, raising interest rates to 4%.
The vote could be split as two members of the MPC, Swati Dhingra and Silvana Tenreyro, voted not to raise interest rates from 3.5% at their December meeting.
Philip Rush, founder of consultancy Heteronomics, said normal wage inflation in the private sector, which reached 7.2% in the three months to November, has unnerved the BoE, making it a target for inflation in the medium term. said it would not be fit to reduce to 2% of
To address these concerns, he expects the MPC to “strengthen its credibility with another 0.5% rate hike in February ahead of April’s important wage round.” said.
Wages are one of the worrying wage-price spirals that could keep inflation too high for too long. Another is the ability and willingness of companies to raise prices, which is also a concern for his BoE.
Core inflation, excluding food and energy, has hovered around 6% for the past nine months, despite headline inflation peaking in October and declining since then.
The Commission is unlikely to be relieved that lower energy prices later this year will bring underlying inflation down quickly enough.
For example, a survey of companies conducted by the BoE on its panel of decision makers found that companies expect to increase prices by 5.7% over the next year.
Alongside interest rate decisions, BoE watchers will also be interested in economic forecasts made by central banks and comments by officials. [as guidance] On how much more the banks will take.
The bank’s projections show headline inflation falling sharply in the second half of this year and in 2024, hitting the 2% target in about two years and likely to remain below target for some time thereafter.
A key signal, said James Smith, research director at the Resolution Foundation Think Tank, is inflation forecasts over a “policy-relevant period” of about two years, suggesting that the BoE has said “potential inflation has “It may prove to be more persistent than previously thought,” he said. .
He also said the February meeting will allow the BoE to break previous forecasts and take a fresh look as it coincides with the MPC’s annual inventory survey of the economy’s ability to grow without inflation. .
The BoE could revise views on the number of people who believe they are looking for work and the economy’s productivity, both of which could affect views on inflationary pressures.
“MPC has been much more pessimistic about supply potential last year, but it hasn’t said much about the dynamics of that view,” Smith said.
After that decision becomes intense, we will focus on BoE’s signals. Bailey’s recent “easier path” proposal suggests that we are now looking at ways to return to price stability, alleviating the pain of rising unemployment and the longest recession since World War II. I’m here.
However, the Governor is expected to repeat a tough message on prices. Because if inflation cannot be brought down, the governor’s reputation and the bank’s independence in setting monetary policy will suffer.