The Bank of England (BoE), under the leadership of Governor Andrew Bailey, is expected to maintain its interest rate at 5.25% in the upcoming meeting, despite the prevailing inflation rate of 6.7%, which significantly overshoots its target of 2%. The confidence in this decision is rooted in the belief that previous rate hikes have been effective in moderating price increases. Chief economist Huw Pill anticipates a decrease in inflation, attributing this to increasing unemployment figures and decelerating wage growth. However, the reliability of these unemployment statistics is being questioned.
In light of sustained robust wage growth and high near-term inflation expectations, three members of the Monetary Policy Committee (MPC) are predicted to back a 25 basis point hike, according to Deutsche Bank (ETR:DBKGn)'s economist Sanjay Raja. The MPC's previous meeting in September resulted in a closely contested decision to keep rates steady. Sandra Horsfield from Investec expects the BoE to reiterate its strategy of maintaining high rates for an extended period to combat inflation but remains open to additional hikes if necessary.
The BoE's decision will follow that of the US Federal Reserve, which is also anticipated to hold rates steady. This comes as the European Central Bank recently concluded its streak of ten consecutive rate hikes, indicating a shift in central banks' strategies toward addressing inflation.
Meanwhile, Capital Economics disputes the Bank of Canada's stance on necessary interest rate hikes to manage inflation. The Canadian central bank has kept its key policy rate at five percent and hinted at future hikes due to increased inflationary risks. This suggests that inflation could exceed its two percent target until 2025.
Capital Economics argues that the bank's own projections in the Monetary Policy Report contradict this position. It contends that the central bank is overestimating oil prices' impact on inflation while simultaneously projecting weak economic growth. Capital Economics predicts a decline in inflation to 3.1% this quarter and a further decrease next year to an average of 2.5%. This discrepancy could be due to different views on the trajectory of home prices in the housing market, a key factor in calculating inflation.
Capital Economics criticizes the Bank's inflation forecast for assuming that companies will continue raising prices amidst high inflation expectations, which is inconsistent with the bank's downgraded GDP growth projections. As consumer spending slows down, companies may adjust their pricing strategies to remain competitive, potentially leading to lower inflation rates. Therefore, Capital Economics suggests that the Bank should reconsider its language around imminent interest rate hikes.
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