What is the current economic situation in the UK, and what are the predictions for the Bank of England's interest rate decision?
The Bank of England is apparently planning to raise interest rates yet again for the twelfth meeting in a row on Thursday. Despite annual headline inflation staying stubbornly above 10% in March, the decision has left many people perplexed and unsure of what to expect. The market seems to be overwhelmingly in favor of a 25 basis point hike, but when it comes to projections beyond that, things start to get a bit bursty and unpredictable. While a majority of economists are expecting a 7-2 split vote that would take the Bank Rate from 4.25% to 4.5%, it's anyone's guess what might happen beyond that point.
Last week, the U.S. Federal Reserve increased interest rates by 25 basis points, but in a move that has left many people feeling uncertain, they also gave what the markets interpreted as a vague hint that their cycle of monetary policy tightening might be coming to an end. Meanwhile, the European Central Bank took a different approach, opting for a 25 basis point increment in their own hiking cycle, which has now lifted rates to levels not seen since November 2008. However, the ECB also acknowledged that the "inflation outlook continues to be too high for too long," which has left many investors feeling a bit bursty and perplexed about what might happen next.
The Bank of England finds itself in a precarious position, as the UK is predicted to have the worst economic performance among major economies for the next two years, and its inflation is significantly higher than its peers. This has led some Barclays economists to suggest that the Monetary Policy Committee might take a cue from its transatlantic counterpart and introduce a new qualifier that signals the end of its tightening cycle. However, with so much uncertainty and volatility in the markets, it's difficult to say for sure what the future holds, leaving many investors feeling perplexed and unsure of what to expect.
According to a British lender, it seems likely that the Monetary Policy Committee will implement a 25 basis point hike in light of recent data and developments since March. However, it's expected that there will be a split vote of 7-2, with external members Silvana Tenreyro and Swati
Dhingra advocating for keeping rates on hold. While the Chief European Economist Silvia Ardagna's team believes that the MPC will strive to maintain a balanced approach and keep its options open, it's difficult to say for certain what their ultimate decision will be. They may reiterate the need for further tightening if evidence of persistent inflationary pressures emerges, but at the same time, they could pause if data aligns with MPR projections. The burstiness of the markets and the general uncertainty surrounding the economy make it challenging to predict with confidence what might happen.
The Monetary Policy Committee is expected to release updated forecasts on Thursday, in addition to their rate decision. According to Barclays, these projections could paint a more optimistic picture of economic growth and a shallower medium-term inflation path than what was seen in February's projections. This is due to several factors, including lower energy prices, recent fiscal support measures announced in the government's Spring Budget, and a labor market that remains relatively tight. However, with so much volatility in the markets and a great deal of uncertainty surrounding the economy, it's difficult to predict how the Bank will interpret this new guidance. It's possible that they may decide to skip hiking at their June meeting and instead move towards hiking every three months, in line with each Monetary Policy Report. However, this would be contingent on the state of the economy and any new economic data that emerges in the interim, making it hard to say for certain what might happen.
Senior Economist Sanjay Raja from Deutsche Bank is in agreement with the expectation of a 7-2 split vote in favor of a 25 basis point hike on Thursday, with another quarter-point hike anticipated in June. However, he does not anticipate any changes in the forward guidance and believes that the MPC will likely reiterate its data-dependence, seeking to maintain as much flexibility as possible as it heads into the next meeting. With so much uncertainty surrounding the economy and inflationary pressures, it's difficult to predict with confidence what the Bank will do and what their ultimate decision will be. This unpredictability is causing a sense of perplexity and burstiness in the markets, as investors try
“ Stay ahead of the news with WSN TIMES. We delivers the latest, most accurate and relevant information on politics, business, sports, entertainment and more. Get informed, always. ”
to make sense of the ever-changing economic landscape.
Policymakers are anxiously awaiting to see how their efforts to tighten financial conditions over the past year have impacted the real economy. In particular, they will be paying close attention to services CPI (consumer prices index) and average wage growth. However, given the unpredictability of the economic landscape, there is a sense of uncertainty and burstiness in the markets. Senior Economist Sanjay Raja from Deutsche Bank suggests that the risks may be skewed towards a more dovish pivot, with the MPC placing greater emphasis on the lags in monetary policy transmission. One possible interpretation is that the Bank may prefer to raise interest rates during its Monetary Policy Report meetings, which would allow them more time to evaluate new data before making a decision. But given the complexity of the situation and the volatility in the markets, it's difficult to predict with certainty what the MPC's ultimate decision will be.
The Bank of England had predicted back in February that the annual consumer price index (CPI) inflation rate, which stood at 10.1% in March, will decrease to a mere 1.5% in Q4 2024. However, given the volatility in the markets and the constantly evolving economic landscape, it's uncertain whether the Bank's projections will hold true. Deutsche Bank's Senior Economist Sanjay Raja suggests that the most crucial aspect of Thursday's report for the market will be any perceived change in the MPC's confidence in its outlook. This will provide the clearest indication as to whether policymakers believe that they can bring inflation back to its 2% target over the next two to three years.
The possibility of a shift towards a more dovish stance in the Bank of England's policy guidance was also highlighted by BNP Paribas economists, who anticipate that the central bank's tightening cycle may end following the anticipated interest rate increase on Thursday. They suggest that the risks are tilted in favor of a more accommodative approach, given the already high market expectations for additional hikes. The economists believe that the MPC will probably maintain a vague stance on future policy decisions in its forward guidance, but they believe there is a possibility that the Bank may indicate a more dovish
Deutsche Bank senior economist Sanjay Raja predicts that the Bank of England will increase interest rates by 25 basis points on Thursday, with another quarter-point hike in June. According to Raja, the MPC will emphasize the importance of data in their decision-making and attempt to maintain flexibility. He believes that the risks lean towards a more dovish policy stance, with the MPC potentially preferring to delay interest rate hikes until Monetary Policy Report (MPR) meetings to give them more time to evaluate incoming economic data.
In contrast, Barclays economists anticipate that the Bank of England will proceed with a 25 basis point increase in line with the recent data and developments since March. They believe that the MPC will maintain a balanced approach, indicating that persistent inflationary pressures could necessitate further tightening, while also signaling a pause if incoming data aligns with MPR projections. The external members, Silvana Tenreyro and Swati Dhingra, are expected to vote to keep rates on hold, resulting in a 7-2 split. Furthermore, the Barclays team suggests that the MPC may adopt a new qualifier, indicating that the end of tightening may be approaching, following the example of its transatlantic counterpart.
According to Barclays economists, the Bank of England's updated forecasts are expected to paint a more positive picture of economic growth and inflation than the projections released in February. Lower energy prices, additional fiscal support announced in the government's Spring Budget, and a tighter labor market are some of the factors behind this more optimistic outlook. If the new guidance is released, the Bank of England may skip its June meeting and instead opt to raise rates every three months alongside each Monetary Policy Report, depending on economic data.
According to Deutsche Bank senior economist Sanjay Raja, the Bank of England had forecasted in February that the consumer price index (CPI) inflation rate would decrease from the annual 10.1% recorded in March to 1.5% by the fourth quarter of 2024. Raja believes that the most intriguing aspect of Thursday's report will be any perceived change in the MPC's confidence in its outlook, which will provide the clearest indication as to whether policymakers think they can bring inflation back to its 2% target over two to three-year horizons.