United Kingdom: BoE hikes by 50 basis points in August
On 4 August, the Bank of England (BoE) increased the bank rate from 1.25% to 1.75%, marking the sixth successive rate hike. The BoE also announced it would likely begin bond sales after its September meeting.
The Bank’s decision to tighten its stance was driven by the desire to avoid currently high inflation becoming entrenched. The Bank now expects inflation to peak at over 13% in Q4, up from its June projection of slightly above 11%, due to higher wholesale gas prices as Russia has restricted supply. Moreover, the BoE judged that the tight labor market meant that near-term nominal wage growth would be higher than previously forecast. These factors outweighed downbeat economic projections: The Bank expects the UK to enter recession in Q4.
Forward guidance remained hawkish, with the Bank reiterating that it was prepared to act “forcefully” if high inflation persisted. The Consensus is for over 50 basis points of additional tightening by year-end, although the discrepancy among analysts is large, with some seeing no further hikes and others expecting up to 125 basis points of extra tightening.
Nomura’s George Buckley gave his outlook for rates:
“We have adjusted our view and now see few barriers to another 50bp hike on 15 September (versus our previous view of 25bp). That would then take rates to 2.25%, following which a final 25bp hike in November would leave rates at a terminal level of 2.50% before modest (2x25bp) rate cuts in mid-2023.”
Daniel Vernazza, chief international economist at UniCredit, sounded more dovish:
“A likely more pronounced weakening of economic activity in the coming months will cause the MPC to step down the pace of rate hikes in September to 25bp. The window for further hikes will probably close by the end of this year as the labor market softens and inflation starts its descent.”