Bank of England could be about to hike rates in the face of surging

LONDON — The Bank of England‘s Monetary Policy Committee will meet Thursday to decide whether to pull the trigger on interest rate hikes.

Policymakers have intimated that a hike is imminent, but the nine-member MPC will need to determine whether to tighten policy this week or wait until its mid-December meeting, in light of persistent above-trend inflation and moderating growth.

Markets are uncertain about the timing, with analysts suggesting the vote is likely to be split. Some BOE policymakers, such as Governor Andrew Bailey and renowned hawk Michael Saunders, have hinted that they could back an immediate hike, while others have seemed more reluctant.

Silvana Tenreyro signaled recently that she would need to see further labor market data following the end of the U.K.’s furlough scheme on Sept. 30 before voting to begin the path toward policy normalization.

At Monday’s close, market data showed that derivatives traders were pricing in a 64% probability of a 15 basis point rate hike this week, Berenberg highlighted in a note Tuesday. Senior Economist Kallum Pickering said that while his team considers a first hike in December “slightly more likely,” a move this week would not come as a surprise.

Pickering noted that an increase to the base rate of 15 basis points from its current historic low of 0.1% would keep monetary policy ultra loose, but may have a significant impact on rate expectations, which have shifted dramatically over the past month.

“Having brought forward the first hike from March 2022 to November 2021 since the start of October, the market now looks for the Bank Rate to rise to 1.25% by end-2022 followed by 40 bps in cuts from mid-2023 to end-2025,” he said.

“In essence, the market seems to expect a BoE policy error in the coming years in the form of an over tightening in 2022 that needs to be corrected with modest rate cuts thereafter.”

As such, Berenberg believes a first move on December 16 and an increase to 0.75% by the end of 2022, with further hikes in 2023 taking the Bank Rate to 1.25% around a year later than current market expectations.

Whether or not the Bank hikes rates on Thursday, Berenberg expects the MPC to send a clear signal in its forward guidance.

The path to tightening is complex

Central to the MPC’s headaches is the unique nature of the pandemic recovery, in that policy stances can shift as incoming data evolves, particularly with regards to growth and inflation.

British inflation slowed unexpectedly in September, rising 3.1% in annual terms, but analysts expect this to be a brief respite for consumers. August’s 3.2% annual climb was the largest increase since records began in 1997, and vastly exceeded the Bank’s 2% target.

GDP grew 0.4% in August after an unexpected contraction of 0.1% in July, as staff absences linked to the Covid-19 Delta variant surged.

“Like other major…