Key Points
- Bank of England expected to hike interest rate by 25 basis points to 0.5%
- Interest rate hike would be first back-to-back increases since 2004
- MPC expected to vote 9-0 to lift the interest rate
- Policy of reinvesting proceeds from maturing government bonds set to end
By Samuel Indyk
Investing.com – The Bank of England is expected to hike its interest rate for the second consecutive meeting on Thursday, marking the first back-to-back rate increases since 2004.
Of the 45 analysts and economists surveyed by Reuters, 29 are looking for a 25 basis point hike with 16 expecting the central bank to keep rates unchanged. Markets are currently pricing in a 100% chance of a hike at this meeting.
The minutes are released alongside the decision and are expected to show all nine members of the Monetary Policy Committee were in favour of a hike, with Silvana Tenreyro joining the other members in voting for an increase in the Bank Rate.
If the BoE does raise its interest rate, then it signals the start of quantitative tightening, or the end of reinvestments of maturing government bonds. Under its own guidance, the BoE said that it would stop reinvesting proceeds when the Bank Rate reached 0.5% and would actively start selling bonds to market when the interest rate hits 1.0%.
“For markets, the logical conclusion would be that curve flattening pressure will ease this year as the BoE stops reinvestments,” ING analysts said in a research note. “But so far at least, it hasn’t played out this way. Private sector demand is solid and is expected to more than offset the BoE shortfall. Meanwhile, the BoE’s aggressive hiking campaign priced by the curve has displaced demand from short to long-end bonds.”
Recent comments and data
Comments from BoE officials have been few and far between since the last meeting. Governor Andrew Bailey warned that inflationary pressures may not be as short-lived as previously hoped. Inflation, as measured by the consumer price index, rose to 5.4% in December, the highest level in almost 30 years.
Catherine Mann, an external member of the MPC, signalled that further rate increases might be needed.
“Going into 2022, current price and wage expectations coming from the monthly decision maker panel are inconsistent with the 2% target, and if they are realised in 2022 are likely to keep inflation strong for longer,” Mann said in a speech on 21st January. “In my view, the objective for monetary policy now should be to lean against this ‘strong-for-longer’ scenario.”
Impact on the Pound
The Bank of England is not the only central bank in town on Thursday. The European Central Bank announces its policy decisions just 45 after the BoE so focus for the day could be on the EUR/GBP cross.
Analysts at Danske Bank say they are of the view that 0.8300 was the bottom in EUR/GBP.
“Markets are pricing in a total of nearly 125bp rate hikes this year, which is more than our base case (75bp), although we recognise that risks are skewed towards more rate hikes,” Danske Bank analysts said in a research note. “It may be that we are wrong and markets are right, but unless inflation surprises to the upside over the course of the year, we think it is difficult for markets to price in more rate hikes than the current five.”
The bank suggests that this means GBP will see less support from relative rates going forward, and in fact, relative rates may become a drag if markets start to price in more aggressive actions from the ECB and/or less aggressive actions from the BoE.
“As markets are pricing in a rate hike from the Bank of England next week, the hike in itself should not move markets,” Danske said. “The question is whether BoE pushes against market expectations or not.”