It’s the turn of the Old Lady and the Bank of England to address sky-high inflation when it meets tomorrow and decides on interest rates. Money markets fully expect another 25bp rate hike which would mark the eleventh straight increase by the bank and take the Base Rate to 4.5%. That bit is fairly certain, but less so is what it says and does afterwards.
The policy decision will be based on a new set of forecasts which are expected to reveal that the MPC no longer see a recession, while implying greater inflation pressures after the higher-than-expected outcomes in the first quarter. Headline CPI remained in double digits and is the key issue for policymakers at present. The still tight labour market is also a chief concern which the hawks say could lead to stubbornly high inflation even after the energy and food price shocks fade.
If the accompanying bank projections show major upside risks to the inflation outlook, then this could seal a further hike in June and push GBP to new highs. We note that Governor Bailey recently reminded markets that more tightening would be needed if signs of persistent inflationary pressures become evident. On the flip side, Chief Economist Pill has repeated his line that there is a lot of policy in the pipeline still to come through.
Markets are currently pricing in a peak rate around 4.85% so a bit more than two more 25bp rate rises. A large part of sterling’s outperformance has been due to the market’s hawkish expectations on the BoE. Any cautious signals by Bailey & Co could see GBP’s bullish run come to an end. But the sterling doomsters have been shocked by its outperformance this year. Indeed, major short positions have been closed out recently with big futures traders turning positive on the pound for the first time in 14 months.
Here are the numbers to know ahead of the meeting:
