LONDON — The Bank of England is expected to opt for a fourth consecutive interest rate hike on Thursday, but economists fear it is entering increasingly choppy waters.
Annual U.K. inflation hit a 30-year high of 7% in March as food and energy prices continued to soar. Meanwhile, consumer confidence has plunged amid fears of slowing economic growth following Russia's unprovoked invasion of Ukraine.
The Bank imposed its third hike in a row at its March meeting, taking the bank rate to 0.75%, and the market expects a 25 basis point increase to 1% when the Monetary Policy Committee meets on Thursday.
Like many central banks around the world, the Bank faces a tough task in reining in inflation without stomping out growth.
Governor Andrew Bailey recently noted that the Bank is walking a "narrow path" between growth and inflation, and implied that the Bank may look to take a more incremental approach to tightening, rather than following the U.S. Federal Reserve with a 50 basis point hike.
The MPC in February forecast inflation to reach a peak of 7.25% in April, but economists now expect it to exceed this and remain higher for longer in light of Russia's invasion of Ukraine and subsequent spike in commodity prices.
Given the nature of the inflationary pressure, Berenberg Senior Economist Kallum Pickering said in a note entitled "BOE preview: A risky hike" on Tuesday that the Bank's widely anticipated hike is "not without risk."
"On a policy relevant horizon – of say two years from now – the Putin shock will probably depress demand growth, which may also affect inflation dynamics over time. If we are unlucky, the U.K. is already in the early stage of a recession," Pickering said.
"Amid unusual uncertainty, policymakers – who should aim to minimize output losses over the business cycle – would better keep policy unchanged for now until incoming data dictate the appropriate policy response."
Even prior to the war in Ukraine, the MPC was projecting persistently high inflation and a darkening growth outlook, and ING Developed Markets Economist James Smith said new forecasts issued Thursday are likely to show that the growth-inflation trade-off has only magnified since.
"The net result is likely to be an inflation forecast that peaks around 9% in April and stays not far below that throughout 2022, and an economic outlook that features at least one-quarter of negative growth this year," he added.
Emerging division
With this uniquely uncertain terrain comes expectation of greater divergence among policymakers. The MPC voted 8-1 in favor of March's 25 basis point rise, with Deputy Governor John Cunliffe citing the two-sided risks to the inflation outlook as the reason for his vote to keep the bank rate unchanged.
Smith also suggested that any sign of widening dissent would offer a hint to markets that the rate hike cycle could be nearing a pause.
"The question for this week is whether the rising risks to demand will motivate other policymakers to side with Cunliffe – who will likely continue to support a wait and see approach," Berenberg's Pickering said.
"Judging by OIS (overnight index swaps) markets, which predict that the BoE will hike six more times in 2022 to take the bank rate to 2.25% by year-end, more dissents in favor of remaining on hold would be taken as a dovish surprise."
No start to bond sales yet
The Bank began unwinding its balance sheet in February, passively reducing the record £875 billion of U.K. gilts held at the start of the year, by not reinvesting maturing assets and actively selling its much smaller £20 billion of corporate bonds.
Pickering noted that while the central bank's guidance suggests that it could begin active gilt sales when the bank rate reaches 1%, the heightened risk of market volatility and tightening financial conditions renders it unlikely to start active gilt sales on Thursday.
"In case the BoE does begin active gilt sales, it is likely to start very gradually – probably at a pace of no more than £1bn per week – so that the policymakers have scope to assess the market impact and adjust the pace thereafter if necessary," he said.
https://news.google.com/__i/rss/rd/articles/CBMiamh0dHBzOi8vd3d3LmNuYmMuY29tLzIwMjIvMDUvMDQvYmFuay1vZi1lbmdsYW5kLWZvdXJ0aC1zdHJhaWdodC1yYXRlLWhpa2UtZXhwZWN0ZWQtYXMtaW5mbGF0aW9uLXNvYXJzLmh0bWzSAQA?oc=5
2022-05-04 09:42:30Z
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