Bank of England Meeting Preview: How hawkish can the MPC be?

04/05/2022

Economists and the market are unanimous in their expectation for the Bank of England to raise the Bank Rate to 1%. This would be a fourth straight 25 basis point move in as many meetings. But the release of updated economic projections and an uncertain outlook leaves policymakers in a tricky position going forward. Rampant inflation and slowing growth have created a toxic mix. This means a dovish hike and tone is anticipated at Thursday’s meeting.

Sluggish economic activity has been seen in disappointing first quarter growth data which showed UK GDP expanding by just 0.1% in February. Retail sales have slowed, and one measure of consumer confidence has fallen to a record low. Meanwhile, markedly higher inflation could peak around 9% in April and stay not far below that throughout 2022.

Similar to other central banks, the market is out of step with what we’ve recently heard from the bank. The March meeting saw a much more dovish signal with one MPC member voting for an unchanged Bank Rate, and no-one voting for a bigger 50bp move. This is expected to be the case on Thursday. Governor Bailey only last week emphasised that the UK growth story is closer to Europe. He also recently implied that policymakers were comfortable taking a more phased approach to raising rates.

On the flip side, money markets have priced in a hike at every meeting this year. That equates to a total of 150 basis points and an end rate at 2.5%, with risk skewed towards a 50-point rate hike at one of the upcoming meetings. The prospect of a commencement of QT (quantitative tightening) where the bank sells off bonds it bought during the Covid crisis will also tighten monetary conditions. Sterling has been hit recently, mainly on the back of dollar resilience. If the Old Lady wants to fulfil its inflation mandate and restore some credibility, then GBP may find some support. But previous BoE rate hikes haven’t helped as the bank has found it tough to spin a positive message.

Here are the key numbers to know ahead of the meeting:

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