Proactive Investors - Markets are pricing in one more interest rate hike in the UK but the turmoil in the banking sector has left analysts split as to whether that increase will come next week or not.
Laith Khalaf, head of investment analysis at AJ Bell noted: “There’s been a big shift in monetary policy expectations, which suggests we are now pretty close to the top of the interest rate cycle in the UK. Markets are currently pricing in a ‘one and done’ hike for the Bank of England, with a peak of 4.25% for the UK’s base rate.”
But he added, “there is considerable uncertainty about the precise timing of the remaining interest hike", with, "a 50% chance placed on it happening at the forthcoming March meeting.”
Economists at ING Economics felt the question of whether the BoE will follow through with a 25bp hike next week unsurprisingly depends heavily on the situation in the banking sector.
“While the feedthrough to the UK is still unclear, beyond global moves in asset prices, the BoE has made it clear that the bar to pausing rate hikes is now fairly low – certainly lower than the Fed and ECB have recently been indicating. The chances of 'no change' are much higher than they were last week”, they noted.
If the Bank’s Monetary Policy Committee passed on an increase next week it would be the be the first time without a hike since November 2021.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics sees no need to raise rates. He looked at yesterday’s budget and felt Jeremy Hunt sensibly used it to focus on supply-side reforms, rather than measures that would give a short-term boost to demand.
“The MPC therefore, need not counter the Budget by raising Bank Rate at next week’s meeting,” it said.
“All told, then, we continue to expect the MPC to keep Bank Rate at 4.0% next week, and at all subsequent meetings this year.”
Khalaf highlighted a number of factors behind the more muted expectations. The failure of SVB, and the more recent travails of Credit Suisse (SIX:CSGN), have created “widespread concern that something is about to break as a result of tighter monetary policy.”
While at same time the battle to tame inflation has shown signs of being won. Khalaf pointed out the OBR now expects inflation to fall to 2.9% at the end of this year.
ING said on paper, the changes to the Energy Price Guarantee are the most consequential for the Bank of England, in so much as it changes the outlook for inflation.
"The government’s decision to cap the average household energy bill at £2500 (annualised) in the second quarter, as opposed to £3000, will cost roughly £3bn next fiscal year."
"But the scheme is still set to cost a small fraction of what it had been expected to cost at inception last summer."
As a result ING estimate headline inflation is likely to end the year at 2%, on its current forecasts.
Tombs thought the MPC would be "broadly indifferent to this Budget" given the two measures which stimulated demand - the freeze on petrol duty and the postponement of the rise in the Energy Price Guarantee - will "help to bring down CPI inflation in quarter two more quickly than otherwise."
"The contribution of electricity and natural gas prices to the headline rate of CPI inflation in quarter two will be 0.9pp lower than the MPC expected last month, while motor fuel’s contribution will be an additional 0.3pp lower than the Committee thought, Tombs calculated.
"As a result, the pressure on businesses to raise wages sharply again this year will be less intense than otherwise, giving the MPC more flexibility," he added.
Khalaf reckoned the Bank may also be wary of rising rates as monetary policy takes a long time to filter through into the real economy, and so “we are only now just beginning to see some of the effects of the tightening cycle of the last year or so.”
He noted the failure of SVB is one such example while there are also 4mln UK households who are forecast to face higher mortgage payments this year.
“Energy price falls may well be in the pipeline, but high interest rates are picking up the baton of putting pressure on the finances of both consumers and businesses,” he cautioned.