Why the Bank of England is unlikely to push back against lofty interest rate expectations

Markets are pricing almost six more rate hikes from here, and while we doubt the Bank of England would endorse that, we don't think it will want to push back heavily either given the recent tendency for inflation data to come in above expectations. Expect a 25 basis-point rate hike next week and only vague guidance on what's likely to come next.

Our base case for Thursday's meeting

A 25 basis-point rate hike, most likely backed by seven committee members, with two (Silvana Tenreyro and Swati Dhingra) voting for no change. A further 25bp hike in August is likely should the inflation data continue to come in hot.

Markets are pricing almost six more rate hikes

After some unwelcome inflation and wage data, markets now expect the Bank of England (BoE) to take rates close to 6% over the coming months. That equates to almost six additional rate hikes and is very close to the highs we saw in the midst of the ‘mini budget’ crisis last year. The divergence between US and UK rate expectations for later this year has become equally magnified.

Back then, the Bank of England explicitly warned investors that rates were unlikely to go as high as markets were pricing. So the question for Thursday’s meeting, where a 25bp hike is highly likely, is whether the Bank offers up similar pushback against investor expectations.

We think it’s unlikely, for three reasons. Firstly, the circumstances surrounding the spike in yields are quite different to last autumn. Back then it was a byproduct of market stress/poor functioning; now, it’s largely a consequence of sticky inflation and wage data.

Secondly, and with that in mind, the Bank has little certainty over where short-term inflation data are likely to go. So it’s doubtful that policymakers will want to make a pre-commitment on policy, only to have to change tack if data continue to come in hot.

And finally, the Bank has had ample opportunity to sound the alarm over recent days and has opted against doing so. Unlike the Fed and ECB, the BoE typically offers very little commentary between meetings. Without additional guidance, markets have interpreted the recent wage/inflation surprises as requiring a significant monetary policy response.

Markets once again expect UK and US rates to diverge