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Expect more interest rate rises

15th December 2022

Commenting on The Bank of England (BOE) interest rate of 0.5%, Melanie Baker, senior economist at Royal London Asset Management said:

“Does it make sense to expect any more hikes from the Bank of England?  Probably, yes. Among other things, they describe domestic wage and price pressures as “elevated” and those hiking rates still sound like they regard risks to their inflation forecasts skewed to the upside.

“February is when the BoE will take stock of the supply picture for the economy in a more in-depth way. A key uncertainty for their forecasts, and therefore policy outlook, is how the supply-demand imbalance in the labour market will evolve. At the moment they think the labour market is historically very tight but appeared to be past its peak tightness. However, a deep dive into the supply picture could change their views on the likely path for rates in addition to regular news flow between now and then.

“The forward signal on rates was similar in the November statement, but they dropped the reference to the market having too much priced in. That does not mean that they now see the estimated 4.5% peak that markets have priced in as completely consistent with their forecasts for the economic outlook. They might still regard 4.5% as too much, but not egregiously so.  They don’t tend to make a habit of explicitly telling the market they have too much or too little priced in, so the dropping of that reference could be seen as a return to more normal communication from them.

“Overall, the minutes today and their last set of forecasts from November remain consistent with downside risk to my forecast peak for UK interest rates at 4.5%.  However, I’m inclined to keep pencilling it in as the peak while domestically driven inflation pressures still look relatively strong.”

- ENDS –

The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.