BOE Hike Seen As Certain After Inflation: Decision Guide

The Bank of England may be forced to increase interest rates again by Thursday due to the escalating inflation in Britain. This is against the backdrop of the chaos on the UK mortgage markets.

Investors and economists expect the Monetary Policy Committee (MPC) to increase its key rate by another quarter point to 4.75%. This will be the 13th hike in the cycle that has seen the fastest increases in over three decades.

A second shock inflation reading, on Wednesday, has opened the way for a larger half-point increase. This would be the first one since February. The money markets give a 40% chance of a larger half-point rise to 5%.

The attention will be focused on the BOE Governor Andrew Bailey’s and his colleagues’ response to a spike in bets that UK interest rates could reach as high as 6 percent, which would mark the highest rate in 20 years. The expectation of a rate hike has pushed mortgage rates up and lenders have been rushing to pull home loan products. This is putting more pressure on Britain’s already stressed households.

Here are some key points to keep an eye on when the decision is announced at 12 noon London time.

After the unexpectedly strong data on wages and prices, the BOE may be forced to face the massive surge in bets by investors that interest rates will rise in the coming weeks. Investors expected that rates would peak just below 5% before the May meeting. Inflation has been surprisingly strong since then and this betting has moved to 6%.

After the recent market boom, the BOE will have to balance a more difficult situation.

The economy is still benefiting from the majority of previous increases, even though the data on wages and prices are booming. The US Federal Reserve already has paused their rate-raising cycle.

At the November meeting, the BOE reacted to rate expectations which had become too high following the disastrous economic program of the former prime minister Liz Truss. The recent data could make it harder to justify such an intervention.

James Smith, economist for developed markets at ING, said: “With inflation consistently coming out hotter than anticipated, we suspect that officials will be less willing to give any firm guidance as to what comes next.”

The BOE will likely signal that the forecasts for August will reveal inflation to be higher than expected. This is due to unexpectedly strong data from April and May.

Wednesday’s data showing inflation holding at 8.7% in May was the fourth straight month of stronger-than-expected data. The price pressures have reached their highest level in 31 years. This is contrary to expectations of a rapid drop in inflation in this year.

The BOE may not release any new forecasts until the end of its next meeting on August 3, but it could use Thursday’s minutes to warn that both inflation and economic growth are likely to be negatively affected.

The rate bets have fueled an increase in mortgage rates. This will put pressure on 1.3 million households who are due to refinance their fixed-rate loans from April until the end of the year.

Moneyfacts data shows that, in the lead-up to today’s MPC vote the average rate for a fixed-rate two-year deal was over 6%. This is close to the record high of 14 years set late last year.

According to the Institute for Fiscal Studies, the average mortgage holder would pay nearly £280 extra each month at current rates compared to a scenario in which borrowing costs continued through March 2022. This is 8.3% of the disposable income.

The BOE could comment on its expectations regarding the impact of recent increases in mortgage rates and their next forecasts.

Silvana Teyreyro will lead the MPC’s nine-member chief dove for the final time, as her tenure as a rate-setter is drawing to a conclusion.

The majority of economists predict a 7-2 split in favor of a quarter point hike. This is the same split that was seen at the three previous meetings. The inflation data on Wednesday could lead at least one rate setter, like Catherine Mann, to support a larger increase.

Neil Shearing is the chief economist of Capital Economics. He said that while the meeting was “finely balanced”, the “ugly” inflation print tipped the balance in favor of a half-point rise on Thursday. Megan Greene, global chief economist at Kroll Institute and new member of the MPC starting July 5, could push the committee in a more hawkish path. She replaces Tenreyro. Before the BOE makes a decision in September on how to run off its bonds, the debate about the BOE’s reverse of quantitative easing will be a reality. Since the global financial crises, the BOE has bought up to PS895 billion in bonds. Now it is winding down this program under a new name called quantitative tightening.

Last month, Deputy Governor Dave Ramsden suggested that the BOE’s bond portfolio is currently being reduced at an annual rate of approximately PS80 billion. Goldman Sachs, however, argued this week that BOE would actually reduce the pace due to the volatility of the market and the amount of gilts that investors must absorb.