BoE’s hiking plan continues, but growth and inflation concerns persist

[MongiIG]

While Thursday sees the continuation of the BoE’s hiking policy, it faces a tricky task in coming months.

Source: Bloomberg

 Chris Beauchamp | Chief Market Analyst, London | Publication date: Tuesday 15 March 2022 

This week marks a return to the 0.75% interest rate the Bank of England (BoE) had before the pandemic.

The increase, which like the Federal Reserve’s this week is viewed as a near-certainty, marks a third increase and the continuation of the hiking policy in place since the end of 2021.

Inflation pressures remain as growth slows

The problem for the BoE, like other central banks, is that inflation continues at an elevated level. It had been expected to peak this year at around 5.5%, but the Ukraine war has driven oil prices higher still, signalling that consumer price inflation (CPI) will keep climbing too, potentially getting close to an astonishing 10% year-on-year.

Coupled with this is the slowdown in growth forecasts, as inflation prompts consumers to reduce spending. The BoE may find itself hiking into a slowing economy, a worrying prospect, and one that will make investors more cautious about UK-focused assets.

More rate hikes to come

Nonetheless, the outlook is for further rate hikes later in the year. While they are not projecting a move all the way back to pre-2008 interest rates, the steady rise this year is projected to carry the rate back to around 2%