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MNI BOE WATCH: Hike Well-Flagged, But Peak Uncertain
Upside surprises to inflation and growth and a tight labour market support the case for the Bank of England to announce a widely-expected 25 basis-point hike on Thursday, but it is unclear whether this will mark the tightening cycle peak as policymakers remain in data-dependent mode.
In recent months the Monetary Policy Committee has appeared to hike reluctantly, and in the absence of clear guidance, analysts are divided whether Bank Rate will stop at 4.5% this week or whether it will rise further to 4.75% or higher, as implied by overnight index swaps. While some analysts are expecting a steer that the rate peak is close, it is debatable whether any such guidance on the peak would carry weight anyway given uncertaintly over the outlook for earnings and prices.
May’s inflation forecasts are likely to be revised closer to the 2% target after February’s forecast round showed the modal projection heavily undershooting at 0.95% two years out and at just 0.37% in three years' time, albeit with a large upside skew.
But the upgrade may have only limited messaging power, as MPC members chose to hike in February despite the projected undershoot. Chief Economist Huw Pill told an MNI event last month that the Bank’s models were less reliable in periods of high inflation.
May Monetary Policy Report forecasts are also set to show marked upgrades for growth and probably wages, in a shift after the Bank predicted in February that the economy would sink into recession in the second quarter.
Labour market tightness and surprisingly rapid acceleration of earnings growth have been key factors driving tightening, according to comments by Deputy Governor Ben Broadbent at a National Institute of Economic and Social Research seminar. While labour market data have eased they have not done so nearly enough, he said.
A wildcard will be what the MPC makes of credit and overall financial conditions in light of U.S. banking sector shocks. The key message from Governor Andrew Bailey has been that the Bank, which has no agreed financial conditions index, will not take its "aim off" monetary policy in response. There are also signs that the mortgage market is picking up again.
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