The Bank of England is set to match moves from fellow central banks with a quarter-point interest-rate hike this week, but its work in taming inflation remains far from finished—and investors should still brace for a hawkish surprise.
While the Federal Reserve and European Central Bank raised rates by 25 basis points last week both of those central banks have signaled that their work is nearly done and will be data-dependent. That amount is also the consensus for the Bank of England’s move on Thursday.
But inflation continues to run hot in the U.K., and despite recent signs that price-growth is slowing, wages remain a pressure that could prompt Governor Andrew Bailey and the BOE’s Monetary Policy Committee to strike a tougher tone on Thursday.
“With most major central banks already seen ending or approaching the end of their tightening campaigns, the only one standing out is the Bank of England,” said Charalampos Pissouros, an analyst at broker XM.
The U.K. has grappled with the worst inflation among the Group of Seven countries, though recent data showed an encouraging moderation of the consumer price index (CPI) in June. This means the BOE’s 14th-consecutive rate hike is unlikely to be another surprise 50-basis point or half-point increase.
“With inflation unexpectedly slowing more than expected in June to 7.9% it could be argued that the pressure … to hike by another 50 basis points has eased,” said Michael Hewson, an analyst at broker XM. “The fly in the ointment for the Bank of England is the rather thorny issue of wage growth which has moved above core CPI, and could prompt the Monetary Policy Committee to err more toward the hawkish side of monetary policy and raise rates by 50 basis points.”
Alongside the usual rate decision, monetary policy statement, and meeting minutes, the BOE will also release on Thursday a package of quarterly forecasts covering inflation and economic growth that will be closely watched by investors.
“There shouldn’t be too much difference with the prior projections,” said Jamie Dutta, an analyst at broker Vantage. “For some time, the Bank’s models have predicted forecast inflation below target in two years’ time and rate expectations have gone higher since May. That means [BOE Governor Andrew Bailey] could simply reiterate that future hikes will happen if ‘persistent’ inflation continues.”
Write to Jack Denton at [email protected]
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