Bank Of England Set To Deliver Another 25 Bps Hike

The Bank of England is all set to raise its benchmark rate for the thirteenth straight policy session this week in the face of elevated inflation and persistent labor market tightness in the UK, but the bank rate is unlikely to peak at the level markets are currently pricing in.

The nine-member Monetary Policy Committee of the central bank is expected to lift the rate by 25 basis points in a split vote as there will be discussion among hawkish members favoring actions to fight second-round effects and the minority of doves who expect inflation to fall sharply this year.

The outcome of the meeting is due on June 22.

The BoE has raised its benchmark rate at every rate-setting session since December 2021. Currently, the bank rate is at 4.50 percent, which is the highest since 2008.

Inflation data for May is due on June 21, a day before the BoE policy announcement. Consumer price inflation is forecast to slow again in May to 8.4 percent from 8.7 percent in April.

In April, core inflation proved to be stickier with the rate rising to a 31-year high of 6.8 percent from 6.2 percent in March.

Data released after the previous policy announcement highlighted the persistence of labor market tightness. In the three months to April, the jobless rate fell to 3.8 percent.

Markets expect the BoE to take the rate close to 6 percent. However, six more rate hikes from here is unlikely, economists at ING said. A 5.0 percent peak for the bank rate seems reasonable, the firm noted.

ING economists forecast a quarter-point hike and a vague guidance on next move from the BoE this week.

Capital Economics’ said the BoE will have to lift interest rates to a peak of 5.25 percent to weaken economic activity and cool the labor market. This is the reason why the research firm expects a recession later this year.

Once core inflation has been quashed, the weak economy will force the BoE to lower interest rates quicker than the markets expect in 2025, economists at the firm added.

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