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The Bank of England is on the verge of a historic decision to deliver the first back-to-back interest-rate increase since 2004 and take the initial steps toward unwinding some of its 895 billion-pound ($1.2 trillion) stimulus program.
With inflation at a three-decade high and set to rise further, investors and economists anticipate the central bank will vote to increase its benchmark lending rate to 0.5% on Thursday. A move of that scale would open the door for the BOE to halt reinvesting the proceeds of bonds that mature in its portfolio.
With those short-term questions seemingly locked in, investors are looking for hints from Governor Andrew Bailey about what further hikes may be in store for the rest of the year -- and he's been strangely quiet before the meeting.
Read More: BOE Risks 1.2 Million Jobless With Quicker Inflation Fight
“There are some people arguing for 0.5% or 0.75% percent increase today, but that would be a knee jerk reaction,” Andrew Sentance, a former member of the BOE's Monetary Policy Committee, said in Bloomberg TV. “What the MPC should be doing is raising a quarter today and signalling” more will come. “There's still a hope for a gradual rise in interest rates. But if things are put off, that becomes much more difficult to achieve.”
The BOE's decision comes as the government is working to ease the impact of a cost of living crisis, which will bite hard starting in April when higher taxes and energy prices hit consumers. An hour before the BOE's announcement, the U.K. energy regulator will confirm how much household bills will rise.
Markets are close to pricing in a rate of 1.5% by the end of 2022, implying the biggest tightening of policy for any calendar year since 1997. That expectation conflicts with the drag on the economy likely to materialize when consumers realize how much of a bite is coming out of their budgets.
That path envisioned by investors also sees rates hitting 1% by June. That's the level at which officials say they will begin actively selling their bond holdings.
The BOE last set out guidance on the issue in August, when a 1% rate seemed a far-off prospect. Its language remains slightly woolly, meaning analysts may be looking for some firmer signals this time round, or even a roadmap for how those sales will be carried out.
What Bloomberg Economics Says ...
“The Bank of England has been eerily quiet since it unexpectedly raised rates in December. A clear desire to show it's serious about price stability means a follow-up hike looks likely in February. Less certain is whether the central bank endorses market expectations for a steep ascent in rates this year.”
Dan Hanson, Bloomberg Economics. Click for the PREVIEW.
The BOE decision feeds into the broader cost of living crisis, which rate hikes alone won't fix.
With inflation already at 5.4%, households are preparing for a tax hike in April, and, more damagingly, a jump in the cost of electricity and natural gas. Most analysts say the Ofgem price cap on bills will rise by about 50% -- bringing the annual cost of energy for the average household to about 2,000 pounds.
Against that backdrop, every economist surveyed by Bloomberg expects the BOE to boost its forecasts for inflation this year, with some expecting a peak of more than 7%. The BOE has no tools to mitigate energy costs directly, putting the onus on the government to step in.
Read More: The U.K. Is Two Months Away From a Brutal Cost-of-Living Crisis
The BOE's announcement is due at noon in London, Here are more details on what to expect:
- The decision will be accompanied by minutes of the meeting and the BOE's latest forecasts. Bailey will then hold a press conference at 12:30 p.m.
- Most economists expect a 9-0 vote to raise the key rate
- Officials may also hold separate vote on the decision to halt bond reinvestments
- Persistently high natural gas prices mean officials also have to address a quirk in their forecasting methodology.
- Rather than factoring in the full-market path for gas futures, officials currently only feed the the first six months of the curve. They assume prices remain constant thereafter. With prices currently elevated through this year, that may overstate the prospects for inflation further out.
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