The Bank of England is expected to raise interest rates by 50 basis points on Thursday, with inflation showing signs of peaking but still uncomfortably high at 10.7% in November.
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LONDON — The Bank of England faces the unenviable task of navigating a slowing economy, high inflation and an extremely tight labor market.
The market is generally pricing in a 50 basis point increase on Thursday to take its key Bank Rate to 3.5%, down from November’s 75 basis point increase, the biggest in 33 years.
After hitting a 41-year high in October, the annual rise in the UK’s consumer price index eased to 10.7% in November, new figures revealed on Wednesday. The slowdown reflected signs in other major economies such as the United States and Germany that inflation may have peaked, although it remains uncomfortably high and well above the 2% target of central bank.
The Monetary Policy Committee (MPC) is faced with the task of dragging inflation back to its target while remaining sensitive to a weakening economy buffeted by several unique domestic pressures as well as global headwinds.
This was reflected in the latest UK labor market data earlier this week, which showed an increase in both unemployment and wage growth, while economic inactivity and interest rates of long-term illnesses are also still historically high.
The UK also faces widespread industrial action over the festive period as workers demand pay rises in line with inflation.
In a note Friday, Barclays economists predicted a split vote among the MPC in favor of another 50 basis point increase, a continuation of the Bank’s quantitative tightening efforts and a tweak to forward guidance.
The British lender predicts two more increases of 50 basis points and 25 basis points in the February and March meetings, respectively, while the terminal Bank Rate at the end of this tightening cycle to 4.25% .
The Bank began its sale of UK government bonds in October, and hopes to reduce its balance sheet by £80 billion ($99 billion) over 12 months, through the active sale of £40 billion in assets and cessation of reinvestments of maturing securities.
Barclays expects these quantitative tightening targets to remain the same, but suggested the MPC could improve its forward guidance. At its latest meeting, the Bank took the unusual step of directly challenging the market’s pricing of the top rate in its reference rate.
The Chief European Economist of Barclays Silvia Ardagna believes that the MPC will re-emphasise that the highest price before November was unrealistic while removing the reference to the current pricing, which has subsequently dropped significantly.
Inflation rises, but more work to be done
While recent GDP and inflation figures have offered modestly positive surprises, Gurpreet Gill, macro strategist at Goldman Sachs Asset Management, said broad-based inflationary pressures mean the Bank is unlikely to come off the brakes anytime soon. short
“Wage growth, a key driver of services inflation, is around 6%, twice the estimated level which is consistent with the Bank’s 2% inflation target,” noticed.
“Structural supply issues stemming from an aging population, low net migration, higher early retirements and an increase in long-term sickness following the pandemic suggest that wage growth may be sticky.”
GSAM also sees further increases in early 2023 until inflationary momentum begins to slow, in line with the Bank’s own assessment that price pressures will ease significantly from mid-2023 and early 2024.
S&P Global Market Intelligence said Wednesday’s CPI picture showed inflation had peaked after several turbulent months, shifting the focus to when inflation will begin to retreat, and how quickly.
“We expect inflation to remain well elevated in the first half of 2023, representing a persistent hit on consumer confidence and real incomes,” said Raj Badiani, chief economist at S&P Global Market Intelligence.
“Furthermore, the pressure on real wages remains unabated, with public sector workers experiencing a once-in-a-lifetime drop in living standards.”
S&P Global Market Intelligence projects that the 12-month inflation rate is likely to fall below the Bank of England’s 2% target by mid-2024 due to “base effects arising from the normalization of -energy and food prices.”
Badiani’s team also sees falling demand helping to ease domestic price pressures, as the UK “struggles to break out of a consumer-led recession in the first half of 2023”.
However, they believe the MPC will raise the terminal rate to a peak of 4% in early 2023, before a prospective inflation “free fall” from late 2023 allows policymakers to start tapering rates from early 2024, eventually returning to the Bank Rate. to 2.5% until November of that year.
