BoE plans 12th consecutive rate hike

The Bank of England is set to increase interest rates for the 12th consecutive meeting on Thursday, as inflation continues to remain high. While the UK economy has held up better than anticipated this year, it flatlined in February due to widespread strikes and the cost of living squeeze hampering activity. Annual headline inflation remained above 10% in March, and core inflation remained unchanged, highlighting the risk of entrenchment. The bank expects inflation to fall rapidly from the middle of 2023, reaching around 4% by the end of the year.

On Thursday, the Monetary Policy Committee is expected to opt for another 25 basis point hike, taking the Bank Rate from 4.25% to 4.5%, with a majority of economists expecting a 7-2 split vote. However, the future projections begin to diverge. The U.S. Federal Reserve implemented another 25 basis point hike last week but hinted that its cycle of monetary policy tightening is coming to a close. The European Central Bank also slowed its hiking cycle last week.

The Bank of England is in a tricky situation as the UK is expected to be the worst-performing major economy over the next two years, with inflation considerably higher than its peers. Barclays expects the MPC to follow the lead of its transatlantic counterpart and suggested a “new qualifier might signal that the end is in sight.” The bank expects a final 25bp hike at the June meeting to a terminal rate of 4.75%.

The MPC will update its forecasts on Thursday, and Barclays expects a more upbeat growth outlook and shallower medium-term inflation path than in February’s projections. This guidance would allow the bank to skip hiking at its June meeting and potentially move to hiking alongside each Monetary Policy Report every three months, depending on economic data. Senior Economist Sanjay Raja expects a 7-2 split in favor of a 25 basis point hike on Thursday, followed by another quarter-point in June.