What will the Bank of England do
BoE, the market shouldn't be surprised by a 50bp hike on Thursday. The analysis by Katharine Neiss, chief European economist of PGIM Fixed Income
The market shouldn't be surprised if the Bank of England (BoE) hikes rates by 50 basis points on Thursday. The BoE might see this meeting as an opportunity to make one last, substantial rate hike before the economic situation begins to wilt significantly, after which it could be forced to moderate the pace of further rate hikes.
There are already signs that the UK economy is starting to cool. Looking ahead, energy prices will continue to rise – fueling higher inflation and eroding consumer spending power – and Europe's largest trading partner, Germany, faces a very difficult winter. While the UK is not directly dependent on Russian gas imports, it is still exposed to a sudden disruption of gas flows from Russia to Europe, resulting in higher prices. This unknown factor alone will weigh on business, both in the UK and across the Channel.
While the prospect of a rate hike above its previous 25 basis point hikes may make it appear that the BoE is lagging behind the curve, investors should remember that the BoE started hikes earlier than other central institutions. and a more aggressive hike on Thursday would therefore not look out of the ordinary given the recent hikes seen elsewhere this summer.
There is still a lot of uncertainty about the impact recent energy price and inflation shocks will have on economic activity, as well as the cumulative impact of the BoE rate hikes since last December, which will take some time. time to be absorbed. There is broad consensus that the economy is set to cool down further, but how much remains to be seen – and this will determine the policy path.
The main risk is that the Fed's aggressive tightening weighs further on the pound against the dollar, putting further pressure on inflation. In a global context, the UK is a relatively small open economy and sensitive to global financial conditions. This dynamic could push the BoE to have to raise rates further, even if the UK economy weakens dramatically.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/che-cosa-fara-la-banca-dinghilterra/ on Wed, 03 Aug 2022 05:02:28 +0000.