Bank of England set to raise rates to 4.75% as inflation slow to fall

London, June 16 (BNA): The Bank of England appears poised to raise interest rates by a quarter point to a 15-year high of 4.75% on June 22, the 13th consecutive rate hike as it battles unexpectedly viscous inflation. risk making it. global anomaly.

Investors are betting this week that the Bank of England could raise interest rates to 6% this year – far higher than where the US Federal Reserve or the European Central Bank are expected to go, a level not seen in Britain since 2000, Reuters reported.

Bank of England Governor Andrew Bailey told a parliamentary committee on Tuesday that inflation was taking “much longer than expected” to come down and that the labor market was “extremely tight”.

Bailey was speaking after official figures showed basic wages rose in the three months through April by 7.2% — the fastest on record, barring periods when the data has been distorted by the COVID-19 pandemic.

While wages are still falling when adjusted for inflation, the figures have caused markets to ramp up bets on a BoE rate hike and pushed two-year government bond yields to their highest levels since 2008.

Three weeks ago, there was a similar sharp move after data showed consumer price inflation fell less-than-expected in April, leaving it at 8.7%, the highest level shared with Italy among the large advanced economies.

“The UK is already in a very difficult situation. It’s obviously a challenge for all central banks, but I think the UK faces a unique challenge,” said Catherine Nice, chief European economist at investment firm PGIM Fixed Income and former Bank of England official.

However, Nice believes that the Bank of England is unlikely to raise interest rates by the amount that the markets have set.

“The direction of travel is the right direction – higher rates – but maybe not as high as the market expects,” she said.

In a Reuters poll this week, economists expected the Bank of England to raise interest rates just twice, bringing rates to a peak of 5% by August or September.

If that proves to be the case, the Bank of England will have no more tightening in store than markets currently expect for the Federal Reserve – which policymakers see as two more rate hikes – or the European Central Bank, which hiked rates on Thursday, its chair Christine Lagarde noted. Another hike in the interest rate. It was likely in July.

The BoE faces three big challenges when assessing how much rate tightening it needs to do.

First, the structure of the British mortgage market has changed since the last tightening cycle in 2006-2007. Fewer households have mortgages and more on fixed rates – so the main channel of interest rate increases to affect the economy is now running late.

While the recent jump in interest rates has spooked homebuyers, the Bank of England estimates that three-quarters of the tightening is yet to be felt.

“The writing is hanging on the wall in terms of the health of the British consumer, which should really be there given the continued negative real wage growth we’re seeing,” said Richard McGuire, head of price strategy at Rabobank.

Two of the nine members of the Bank of England’s Monetary Policy Committee, Swati Dhingra and Silvana Tenryu, have voted against raising interest rates since December.

Second, it is unclear how much of Britain’s inflation premium to other countries is a time lag – in part due to the different timing of energy subsidies – rather than persistent inflationary pressures.

However, the Bank of England may have been alarmed by the fact that core CPI – which excludes energy and food – rose to 6.8% in April, its highest level since 1992. Inflation data for May is due on June 21.

Third, the extent to which Brexit and any long-term effects of COVID-19 on the labor market hurt Britain’s productive potential remains unknown.

“The central bank is effectively ignoring it in terms of getting a really strong view of where the supply capacity of the UK economy is,” Nice said.

Megan Green – the economist who will succeed Tenryu on the Monetary Policy Committee next month – said on Tuesday that she believes the British economy may not be able to grow faster than 1% annually without causing excessive inflation.

In the short term, market interest rate expectations have returned to the level they were in November, when the Bank of England indicated they were too high.

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