Inflation and interest rates, the complex balance all central bankers around the world are trying to manage. The Federal Reserve in May raised interest rates by 50 bps for the 10th time, while the European Central Bank raised interest rates by 25 bps for the 6th time. The Reserve Bank of Australia also raised rates by 25 bps for the 11th consecutive time, along with other countries across the globe.
In the UK, interest rates have reached levels not seen since the financial crisis of 2008 (Figure 1), and are expected to rise further as inflation remains persistently above the Bank of England’s (BoE) target. The market is pricing in a 12th consecutive rise in rates with a 25 bps hike in the BoE’s next meeting later today. This would bring rates up to 4.5%, with calls that the BoE could push as high as 5% in August.
Last month, inflation rose unexpectedly to 10.4% from 10.1% with the cost of housing, utilities, and food applying the most upward pressure. However, it is expected for inflation to average 6.5% in 2023, then decline to 2.3% in 2024, potentially reflecting an end to interest rate hikes this year.
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Figure 1: United Kingdom Interest Rate (1980-2023) based on TradingEconomics.com (April 2023)
Policymakers continue to monitor any repercussions from the recent banking crisis on consumer and corporate credit conditions, along with the macroeconomic and inflation outlook. The BoE has already assured that the UK banking system remains highly resilient with solid capital and liquidity balances.
Investors will be closely anticipating the Bank of England’s decision later today. The focus remains as whether the BoE follow the Fed and hint at a pause, or follow the ECB and signal more. Right now, the market is leaning toward the latter.
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