By Shaloo Shrivastava
BENGALURU (Reuters) – The Bank of England likely has one more hike in its tightening cycle but it was a close call for a final quarter-point rate lift in May, according to a Reuters poll of economists who said the bigger risk was inflation being higher than they expect.
Even though the Bank of England (BoE) started raising rates in December 2021, earlier than most of its peers, UK inflation has remained the highest among them, consistently running at over five times the BoE’s 2% target.
At the March meeting, the BoE said there were signs inflation, last reported at 10.4% in February, was peaking and would probably fade fast, prompting speculation for a pause. However, it kept the door open for more tightening if needed.
Just over half of economists, 33 of 61, expected Bank Rate to rise 25 basis points to 4.50% at the conclusion of the next Monetary Policy Committee meeting on May 11. Three of those 33 expected one more in June.
The remaining 28 polled April 11-17 said rates are on hold. The poll results are in line with market pricing.
But among 15 gilt-edged market makers who participated in the survey, a strong majority of 11 forecast a pause in May, with only four expecting a hike.
Thirty-three of 60 participants expected interest rates to remain at 4.50% or higher for much of this year. A small majority expect it to fall to 4.25% or lower in the final quarter.
“The Bank of England will want to see clear evidence inflation is falling before pausing their hiking efforts. But we do think the days of tightening are limited and we are near the end of that cycle as inflation pressures ease,” said Ellie Henderson at Investec.
One of the main reasons analysts see policymakers struggling over whether to pause or hike is the economy is on the brink of recession, despite recently performing slightly better than expected.
A tight labour market has also fueled inflation, despite the BoE taking borrowing costs 415 basis points higher in its most aggressive tightening cycle since it was given independence in 1997.
All but one of 15 economists who answered an additional question said the bigger risk to their 2023 inflation forecast was it would be higher than they predicted rather than lower.
Several analysts said what the BoE’s Monetary Policy Committee (MPC) does next month would depend on whether March inflation data due this week drops from double digits and gives hope a downward trend may take hold.
“May’s MPC decision is on a knife-edge. While we continue to see a pause as more likely, the risks remain skewed in a hawkish direction,” wrote economists at Citi.
“The key question here is whether February’s upside surprise to core inflation in particular reflected idiosyncratic effects, or something more troubling,” they wrote.
The survey predicted inflation would fall sharply from a 10.1% average in Q1 to 3.4% in the final quarter of this year, but stay above the BoE’s 2% target until at least end-2024. It was expected to average 6.5% and 2.4% in 2023 and 2024 respectively.
Having narrowly escaped recession in the final quarter of 2022, showing zero growth, the UK economy was expected to contract 0.1% in the first two quarters of this year. The economy was predicted to contract 0.3% this year and then expand 0.8% in 2024.