Bank of England rate decision – 23/03 – the big question facing UK markets right now is how close the Bank of England is to its terminal rate, with a base rate currently at 4%, and whether recent events across the banking sector will temper its decision to raise rates this week. Over the past few days, we've seen market estimates of the terminal rate fall from 4.8%, closer to 4.25%, due to concerns over the stability of the banking sector, as a result of the Credit Suisse and SVB inspired volatility of the last few days.
Recent comments from Governor Andrew Bailey have helped to give the MPC some wriggle room this week, when he said that nothing had been decided when it came to further hikes in rates. Bailey did go on to say that more rate rises would likely be needed and that the lessons of the 1970s ought not to be forgotten. His recent comments that the economy was evolving in line with expectations were particularly laughable given that a few months ago the central bank was saying that the UK economy was already in recession, and now it looks like it may avoid one. The MPC continues to remain split with Tenreyro and Dhingra both opposed to further rate hikes even with headline CPI still above 10% and core prices at 5.8%, and wages at 6.5%.
Hawkish MPC member Catherine Mann has continued to insist that more hikes are warranted given stickier inflation dismissing the idea of a pivot to a looser policy, although recent events could temper her outlook here. She did go on to insist that rates would have to stay higher for longer in order for inflation to return to target. This stance seems entirely more credible than the dovish stance of Tenreyro and Dhingra given how stickier UK inflation has always tended to be historically. This is mainly down to the transmission mechanism of a weaker pound, which tends to put a floor under prices. Markets are currently looking for 25bps this week, however, it wouldn't be beyond the realms of possibility if we got no change at all given the recent volatility inspired by events in the US, around the collapse of Silicon Valley Bank, and the events surrounding Swiss bank Credit Suisse, which is creating huge ripples through the European banking sector. What we do know is it's likely to be another split decision and the pound will probably drift lower once Bailey opens his mouth.
