Tomorrow at 9.00pm AEST, the Bank of England is widely expected to raise interest rates by 25bp to 4.50% with a 7-2 vote. The focus, therefore, will be on the MPC’s forward guidance.

Growth has been stronger than expected over the past two quarters, and the UK economy may yet avoid a recession. Inflation remains high due to a drop in labour supply post the pandemic and from global pressures, which have driven price rises for food and energy.

At its meeting in March, the BoE noted that inflation is expected to “fall sharply over the rest of the year”. Evidence of the expected fall is so far lacking. While headline CPI eased to 10.1% YoY in March, from 10.4% in February, it was higher than market expectations of 9.8%. making a dovish pivot extremely unlikely this month.

However, like here in Australia, the impact of the BoE’s rapid 415bp of rate hikes has yet to be felt. This will change in the months ahead as mortgages that were fixed at low rates during covid roll-off.

Furthermore, evidence shows that the labour market is starting to cool, and firm insolvencies have increased.

A combination expected to see BoE water down its forward guidance from March that stated: “If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.”

The BoE’s terminal rate is currently viewed at 4.87%, suggesting the market remains even split between a further two rate hikes taking the official cash rate to 4.75% as opposed to those looking for three hikes taking the official cash rate to 5%.

Bank of England official bank rate