Bank of England Signals Two More Rate Hikes as Inflation Concerns Persist"

Investors think the UK has a bigger inflation challenge than the US or eurozone

When we asked our clients in a recent webinar, 73% of roughly 200 respondents thought the UK had a bigger inflation problem than the US or eurozone. They aren’t alone.

Markets see rates peaking above 6% later this year, and far from pushing back against those lofty expectations, the Bank of England doubled down with a surprise 50 basis-point rate hike last month. And if that message hadn’t sunk in enough, Governor Andrew Bailey went further by suggesting markets were prematurely pricing rate cuts – a particularly hawkish statement, when you consider that markets expect Bank Rate to be at or above current levels for the next two years.

Above all, the latest decision and subsequent comments reflect a growing loss of confidence and patience in the Bank’s models, but also the forward-looking inflation indicators that have been pointing in a better direction for several months now. It’s pretty clear that the next few decisions will be guided by actual inflation and wage growth data, and probably not a lot else.

The decision also suggests that the Bank isn’t done yet. Previously the bank’s more gradualist and pragmatic approach to rate hikes suggested we were very close to the peak. But having returned to 50bp rate hike increments, it’s highly unlikely the committee will be content with holding rates at current levels, or only hiking once more by 25bp, in August.

Admittedly, we aren’t convinced the 50bp move will be repeated, but we think two further 25bp moves in August and September are likely – and we wouldn’t rule out more. Remember that one of the Bank’s two arch-doves also left the committee last month, and early signs suggest her replacement will be more hawkish.

 

Sticky UK services inflation means headline CPI has been higher than expected

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