UK economists expect just one more quarter-point rate hike from the Bank of England even though inflation is stuck in double digits and investors are bracing for a round of increases lasting through the summer.
(Bloomberg) — UK economists expect just one more quarter-point rate hike from the Bank of England even though inflation is stuck in double digits and investors are bracing for a round of increases lasting through the summer.
A survey of economists by Bloomberg showed most anticipate the key rate will rise to 4.5% on May 11 and then remain on hold, pausing the most aggressive cycle of increases in four decades. That’s despite a raft of data showing both the economy and inflation remain surprisingly robust.
The results diverge sharply from market expectations, which are leaning toward rates reaching 5% by September. That betting may shift after decisions due from the US Federal Reserve this evening and European Central Bank on Thursday. Both of those central banks are expected to back another hike.
“While we had previously thought this might be the pause point, the data in recent weeks (notably inflation and wages) make this Federal Reserve much harder to justify,” said Elizabeth Martins, senior economist at HSBC. “While we may see little change in the wording and mood in May, by June the picture could look quite different.”
Money markets have shifted quickly in the UK. Investors have fully priced in a quarter point interest-rate increase this month, but rather than following with a pause, they are wagering the bank rate will continue climbing to above 4.90% by September. Even then, traders were betting on terminal rate above 5% as recently as Tuesday before US regional bank jitters roiled markets.
Economists are less hawkish. About 60% of the 30 forecasters in the UK expect rates to peak at 4.5%, while a third expect two more increases to 4.75%. Only two expect rates to hit 5%, including Goldman Sachs.
The majority predicted a 7-2 vote split on the BOE’s nine-member Monetary Policy Committee between those voting for another hike and the doves calling for a pause. Some expect the more hawkish rate-setters, especially Catherine Mann, may back a bigger hike after being spooked by recent data. They also overwhelmingly expect the BOE to upgrade forecasts for both inflation and gross domestic product this year and next.
The mood of BOE policy makers led by Governor Andrew Bailey could shift markedly between its meetings in May and June. By the following meeting on June 22, the BOE will have seen two more months of inflation data, with a large drop expected in April’s reading as last year’s energy price surge drops out of the annual figures.
Anna Titareva, economist at UBS, said rate rises beyond next week’s meeting will be “highly data dependent.”
“The focus at the next meeting will be on the signals for the future rate path,” she said. “With inflation and wage expectations pointing to gradual easing and high uncertainty about the impact of the already delivered tightening, our current baseline foresees no further hikes beyond May.”
The economists also expect quantitative tightening — the rolling off of bonds bought by the BOE to stimulate the economy — to keep running at the same pace following the initial 12 months with around £10 billion of bond sales per quarter. Just over half expected the BOE to stop shrinking its balance sheet at £400 billion or £500 billion, down from the peak of £895 billion following the pandemic.
–With assistance from James Hirai.
(Updated with fifth paragraph on market expectations,)
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