Is the Bank of England Set For a Fourth Straight Rate Hike?

There is a widespread expectation that the Bank of England (BoE) will raise rates once again.

Annual U.K. inflation reached a 30-year high of 7% in March 2022 as food and energy prices continued to soar.

The Bank imposed its third hike in a row at its March meeting, taking the bank rate to 0.75%, and the market expects a 25 basis point increase to 1% when the MPC meets on Thursday.

Official figures showed GDP increased by just 0.1 per cent in February 2022, compared to the robust 0.8 per cent seen in January 2022.

Bank of England is expected to opt for a fourth consecutive interest rate hike on Thursday, but economists fear it is entering increasingly choppy waters.

The European Central Bank, faced with much the same circumstances, actually is not raising rates.

Like many central banks around the world, the Bank of England faces a tough task in reining in inflation without stomping out growth.

Governor Andrew Bailey recently noted that the Bank is walking a “narrow path” between growth and inflation, and implied that the Bank may look to take a more incremental approach to tightening, rather than following the U.S. Federal Reserve with a 50 basis point hike.

The Monetary Policy Committee (MPC) in February forecast inflation to reach a peak of 7.25% in April, but economists now expect it to exceed this and remain higher for longer in light of Russia’s invasion of Ukraine and subsequent spike in commodity prices.

Even prior to the war in Ukraine, the MPC was projecting persistently high inflation and a darkening growth outlook, and ING Developed Markets Economist James Smith said new forecasts issued Thursday are likely to show that the growth-inflation trade-off has only magnified since.

With this uniquely uncertain terrain comes expectation of greater divergence among policymakers. The MPC voted 8-1 in favor of March’s 25 basis point rise, with Deputy Governor John Cunliffe citing the two-sided risks to the inflation outlook as the reason for his vote to keep the bank rate unchanged.

The Bank began unwinding its balance sheet in February, passively reducing the record £875 billion of U.K. gilts held at the start of the year, by not reinvesting maturing assets and actively selling its much smaller £20 billion of corporate bonds.