The odds of the Bank of England raising interest rates again next month have jumped.
The money markets indicate there is a 97% chance that the BoE lifts Bank Rate by a quarter of one percentage point to 4.5% in May – up from an 82% chance yesterday.
The markest also imply there’s a good chance that rates will hit 5% by the autumn.
The Bank will be concerned that UK inflation looks to be stickier than hoped.
Martin Beck, chief economic advisor to the EY ITEM Club, says:
“After a surprise increase in February, CPI inflation resumed its downward path in March, falling to 10.1% from 10.4%. The fall in the annual rate was more than accounted for by falling petrol prices. However, mitigating this was a further acceleration in food price inflation, which reached its highest level in over 45 years.
“March saw both core and services sector inflation remain unchanged at 6.2% and 6.6% respectively. Stickiness in these measures, the latter of which the MPC often cites as an indicator of domestically generated price pressures, will concern the committee in advance of its May meeting.
The fact that this follows the latest labour market data [yesterday], which showed healthy jobs growth and a surprise pickup in private sector wage rises, and a stronger-than-expected performance from the economy, will probably tip the balance towards another rate rise next month.
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Gurpreet Gill, macro strategist for Global Fixed Income at Goldman Sachs Asset Management, also believes a May interest rate increase is likely, saying:
“While the inflation data for March shows core services evolved in line with the Bank of England’s expectations, the upside surprise in core goods and foods was significant - with food prices rising close to 20% year-over-year.
“In recent months, UK economic indicators have been highly volatile. Efforts to bring about wage normalisation and disinflation have so far been a case of one step forward and two steps back.
“Continued inflationary strength in March, combined with a reacceleration in wage growth in February, will likely see the Bank retain its risk-management mindset and deliver another rate hike in May.”
The Bank of England has already raised interest rates eleven times in a row, which appears to be cooling the housing market.
House price inflation slowed to 5.5% per year in February, new data released by the Office for National Statistics shows, down from 6.5% in January.
That’s sharply lower than the recent house price inflation peak of 14.4% in July 2022, as increasing mortgage costs since September’s mini-budget pushed down demand.
The average price of a house sold dipped to £287,506 in February, the ONS reports, down from £290,381 in January. That’s £16,000 higher than 12 months ago, but £5,000 below the recent peak in November 2022.
The ONS’s data confirms the message from lenders such as Nationwide, who have also shown house prices falling this year.
The ONS adds:
The average UK house price has fallen for the third consecutive month, on both a seasonally adjusted basis and a non-seasonally adjusted basis.
Average house prices increased over the 12 months to £308,000 (6.0%) in England, £215,000 in Wales (6.4%), £180,000 in Scotland (1.0%) and £175,000 in Northern Ireland (10.2%).
Scotland’s annual house price inflation has generally been slowing since the recent peak of 13.8% in the 12 months to April 2022, slowing to 1.0% in the 12 months to February 2023.
The West Midlands saw the highest annual percentage change of all English regions in the 12 months to February 2023 (8.6%), while London saw the lowest (2.9%).
With inflation at double-digit levels, it will be harder for dovish members of the Bank’s monetary policy committee to argue against further rate rises, argues the BBC’s Andy Verity.
Last month, the MPC was split 7-2 when it decided to raise interest rates from 4% to 4.25%, with two members – Swati Dhingra and Silvana Tenreyro – voting to leave Bank Rate at 4%
Here’s a breakdown of how costs have soared in the UK, from sugar to bread, and electricity to pet products, driving up inflation:
With UK inflation not yet back on track, the general consensus at the moment is that the Bank of England will need to hike by 25 basis points, or a quarter of one percentage point, at its May meeting, predicts Giles Coghlan, chief market analyst, consulting for HYCM.
The strong wage growth seen on Tuesday makes another interest rate rise more likely, Coghlan says [wages rose by a faster-than expected 6.6%, which meant real wage still fell].
He adds:
“The issue for the Pound and for the BoE is whether the latest data merits continued tightening.
The surge in average earnings will no doubt be sounding alarm bells that the dreaded wage-price spiral could become entrenched in the UK, which has moved the dial in favour of another 25bps hike when the monetary policy committee convenes next month.
Some investors are fearing that the dreaded wage-price spiral could be about to bite and it will be hard for the BoE to not hike rates next month”
Core inflation (stripping out food and energy) remains ‘stubbornly high’, says Debapratim De, senior economist at Deloitte:
“Inflation has come in above expectations. Food prices have risen at the fastest pace in over 45 years and even after excluding the effect of food and energy prices, residual inflation remains stubbornly high.
De adds that the Bank of England will want to see signs of broader easing of price pressures before contemplating interest rate cuts, cautioning that:
Interest rates seem likely to remain at their peak for longer than markets are expecting.”
The financial markets are pricing three more UK interest rate hikes over the next four Bank of England meetings, points out ING developed markets economist James Smith.
The Bank’s monetary policy committe is next due to set rates on 11th May, then 22nd June, 3rd August and 21st September (by when the markets now suggest rates could have risen to 5%, from 4.25% at present).
Smith says this “seems extreme,” though he agrees that a May interest rate increase is more likely than not.
As Smith explains:
The headline story from Wednesday’s UK inflation numbers is that core CPI stayed at 6.2%, having been expected to slip back towards 6%. Headline inflation unexpectedly stayed in double-digits at 10.1%, though that will start to change in April when the effect of last year’s electricity/gas price hike filters out of the annual comparison. We expect headline CPI to reach the 8% area next month, 5% by summer and roughly 3% around year-end on current trends.
“On paper that core inflation number looks pretty grim for the Bank of England ahead of its May meeting. But we need to remember that the Bank has been making a clear distinction between services and goods inflation over recent months. The former is seen as much more important for policymaking because trends in service-sector inflation tend to be more persistent and therefore relevant over a monetary policy horizon.
And when we cut out some temporary volatility earlier this year, the net effect of the past few months is that services inflation has stabilised. It came in at 6.7% in March, which is only fractionally higher than in February and in line with both our own and the BoE’s expectations at the time of the last meeting.
The Bank of England is failing ‘badly’ at controlling inflation, argues former BoE policymaker Andrew Sentance.
Sentance is calling for further interest rate increases to bring inflation into single-digit levels:
Shares have opened lower in the City of London, as investors anticipate further increases in UK interest rates to fight inflation.
The FTSE 100 index of blue-chip equities is down 27 points, or 0.35%, at 7882, as its eight-day rally threatens to fizzle out.
Sterling is rallying, though. The pound has gained a quarter of a cent to $1.245 against the US dollar, and almost half a eurocent to €1.1365, on expectations that the Bank will lift interest rates higher in May, and maybe again later this year too.
March’s higher-than expected inflation figures are weighing on the markets.
Victoria Scholar, head of investment at interactive investor, tells us:
Core inflation which strips out the more volatile components like energy, food, alcohol, and tobacco rose by 6.2% year-on-year, also ahead of expectations for 6%.
Although there have been growing expectations for a dovish pause from the Bank of England in May, today’s hotter-than-expected inflation data with price pressures stuck above 10%, could tip the balance towards another 25-basis point increase at its next decision meeting.”
Sky News’s Ed Conway shows here how the City now believes UK interest rates could hit 5% this year, up from 4.25% today:
Today’s CPI inflation reading of 10.1% for March 2023 is not good news for the Bank of England, says Professor Costas Milas, of the Management School at University of Liverpool.
He tells us:
The inflation reading could offer some hints on the next interest rate move. Notice that CPI inflation stood at 10.2% for 2023 Q1. This is higher than the Bank’s inflation forecast of 9.73%.
Inflation is therefore proving (much) more stubborn than what the Bank expects. So it make sense to expect that the Bank’s Monetary Policy Committee (MPC) will raise interest rates further to 4.5% on 11th May.
In fact, UK interest rates could potentially rise up to 4.75 per cent by the end of 2023. This is because high public expectations of inflation, currently at 3% two-years ahead compared with the Bank’s inflation expectations of less than 1% (!) are putting additional pressure on current inflation through demand for higher wages.
But, Professor Milas points out that interest rate predictions are “far from straightforward” especially in periods of elevated financial stress like we are currently experiencing.
He adds:
If, instead, financial stress worries take over, UK interest rates might end up below 4% by the end of 2023. Interesting times ahead!
The UK now has Western Europe’s worst inflation rate, points out Andy Bruce of Reuters:
Helia Ebrahimi of Channel 4 News shows how the UK has a bigger inflation problem than other major European economies:
The odds of the Bank of England raising interest rates again next month have jumped.
The money markets indicate there is a 97% chance that the BoE lifts Bank Rate by a quarter of one percentage point to 4.5% in May – up from an 82% chance yesterday.
The markest also imply there’s a good chance that rates will hit 5% by the autumn.
The Bank will be concerned that UK inflation looks to be stickier than hoped.
Martin Beck, chief economic advisor to the EY ITEM Club, says:
“After a surprise increase in February, CPI inflation resumed its downward path in March, falling to 10.1% from 10.4%. The fall in the annual rate was more than accounted for by falling petrol prices. However, mitigating this was a further acceleration in food price inflation, which reached its highest level in over 45 years.
“March saw both core and services sector inflation remain unchanged at 6.2% and 6.6% respectively. Stickiness in these measures, the latter of which the MPC often cites as an indicator of domestically generated price pressures, will concern the committee in advance of its May meeting.
The fact that this follows the latest labour market data [yesterday], which showed healthy jobs growth and a surprise pickup in private sector wage rises, and a stronger-than-expected performance from the economy, will probably tip the balance towards another rate rise next month.
Dr George Dibb, head of the Centre for Economic Justice at the IPPR thinktank, is urging UK policymakers to get a grip on ‘greedflation’, after CPI inflation stuck in double-digits again in March.
Dibb says price hikes by companies to lift their profits are driving up the cost of living, rather than rising wages (which, at 6.6% in the last year, continue to lag inflation).
He explains:
“Household budgets are feeling the pressure from high inflation, which remains in the double digits according to new data. Even though petrol prices have fallen, the cost of essential items like food continues to rise.
“While families struggle to make ends meet, some companies continue to make higher profits from these price hikes, ignoring the impact on consumers.
It’s time for policymakers to look at ‘greedflation’ and prioritise reining in corporate profits, instead of blaming workers’ wages for driving up inflation.”
Last month, the Unite trade union reported that large corporations have fuelled inflation with price increases that go beyond rising costs of raw materials and wages
Bank of England policymaker Catherine Mann has also expressed concern that UK companies could be exploiting the cost of living crisis to push through inflation-busting price increases.
The European Central Bank is also concerned that consumers in the eurozone are suffering from price gouging.
It said last month it was paying just as close attention to trends in profits as to wages.
Here’s a breakdown of the price changes which kept UK inflation at 10.1% in March.
Food and non-alcoholic beverages: 19.1%
Alcoholic beverages and tobacco: 5.3%
Clothing and footwear: 7.2%
Housing, water, electricity, gas and other fuels: 26.1%
Furniture, household equipment and maintenance: 8.0%
Health: 7.1%
Transport: 0.8%
Communication: 3.7%
Recreation and culture: 4.6%
Education: 3.2%
Restaurants and hotels: 11.3%
Miscellaneous goods and services: 6.7%
Overall, goods prices rose by 12.8% in the year to March, while services inflation stuck at 6.6%.
The weak pound and poor harvests abroad drove up food prices in March, says Helen Dickinson, chief executive of the British Retail Consortium.
Dickinson explains:
Food prices, especially for fruit, vegetables and sugar, rose as poor harvests in Europe and North Africa reduced availability, and the weak pound made importing more expensive.
Meanwhile, discounting helped inflation to ease in other areas such as furniture, and clothing & footwear.
“With food price inflation likely to slow in the coming months as we enter the UK growing season, we expect wider inflation will continue to ease. Nonetheless, prices for consumers will remain high, especially as household bill support is lifted.
https://news.google.com/rss/articles/CBMic2h0dHBzOi8vd3d3LnRoZWd1YXJkaWFuLmNvbS9idXNpbmVzcy9saXZlLzIwMjMvYXByLzE5L3VrLWluZmxhdGlvbi1yZXBvcnQtbWFyY2gtY29zdC1vZi1saXZpbmctY3Jpc2lzLWJ1c2luZXNzLWxpdmXSAXNodHRwczovL2FtcC50aGVndWFyZGlhbi5jb20vYnVzaW5lc3MvbGl2ZS8yMDIzL2Fwci8xOS91ay1pbmZsYXRpb24tcmVwb3J0LW1hcmNoLWNvc3Qtb2YtbGl2aW5nLWNyaXNpcy1idXNpbmVzcy1saXZl?oc=5
2023-04-19 08:02:52Z
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