The CPI figure for May will be revealed on Wednesday morning, prior to the MPC's next decision on interest rates. Evidence since the previous gathering has suggested that the labour market is still tight, inflationary pressures are staying strong, and economic growth is overall stable but mixed.
As the Bank of England's Monetary Policy Committee (MPC) prepares for a pivotal decision on interest rates, economists comment that it is in a challenging position with stuck inflation and a constrained labor market.On Wednesday, the May consumer price index figure will be published, a day prior to the MPC's announcement.Data points since the prior session have shown ongoing job market tension and solid underlying inflationary trends, paired with mixed yet surprisingly steady growth induction.Economists therefore assume that the Bank will continue its tightening cycle and bring up its rate higher than initially assumed.On Monday, British two-year government bond yields soared to the highest it has been in fifteen years, 5%, as the market speculated a further 25 basis point augment in the rates on Thursday.Since November 2021, the Bank has undertaken a sequence of increases to its base rate from 0.1% to 4.5%, and the current predictions show it may possibly peak at 5.75%.Headline CPI inflation was registered at 8.7% in April, a decrease from 10.1% the month before, however, core CPI (excluding volatile items such as energy, food, alcohol, and tobacco prices) rose to 6.8%, compared to 6.2% in the past month.The Organization for Economic Cooperation and Development anticipated a headline inflation of 6.9% for this year for the U.K., the highest amongst all advanced economies.
Last week's labor market data came in much better than anticipated, with unemployment falling to 3.8% and inactivity rate dropping 0.4 percentage points. Pay growth (not including bonuses) was 7.2% for the three months to April, surpassing forecasts. Despite the U.K.'s GDP decreasing by 0.3% in March, it regained strength with a 0.2% increase in April. Goldman Sachs Chief European Economist Sven Jari Stehn said there is a "high hurdle" for the Bank of England to increase its rate hike to 50 basis points, as inflation expectations remain contained and an appetite for accelerating the pace has not been expressed. Furthermore, Stehn noted that with resilience in growth, sticky wage pressures, and high core inflation, the MPC may likely keep its accommodative stance and continue to be pushed into rate hikes of 25 basis points, eventually reaching a terminal rate of 5.25%. BNP Paribas economists also agree that a 25 basis point hike will likely take place on Thursday.
The French lender increased its terminal rate forecast to 5.5% from 5% in a recent note, indicating there is "clear evidence of more persistent inflation." The Monetary Policy Committee (MPC) is expected to prolong its tightening cycle in order to curb inflation, but remains "wary of over-tightening" as U.K. mortgage borrowers face higher borrowing costs and product removals when their fixed-rate mortgage renewals come up in the second and third quarters. Laith Khalaf from AJ Bell commented that the MPC is in an awkward position between pushing more borrowers to their limit and allowing inflation to run amok. He added that the present interest rate reflects the market's concern and a moderation in inflationary pressures over the summer would ease the situation, unless inflation data remains aberrant. In this case, the Bank of England and the Treasury need to take action and ensure the Prime Minister's commitment to halving inflation is fulfilled.
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