Problem deepens as inflation, labor market remains hot

LONDON – The Bank of England is “caught between a rock and a hard place” as it prepares for a key monetary policy decision against a backdrop of sticky inflation and a tight labor market, economists say.

May’s consumer price index figure will be released on Wednesday morning, the day before the Bank’s Monetary Policy Committee (MPC) announces its next move on interest rates.

Data points since the last meeting have pointed to continued labor market tightness and strong inflationary pressures, along with a mixed but surprisingly steady growth trend.

So economists now expect the Bank to extend its tightening cycle and raise interest rates to a higher level than previously expected.

2-year British government bond yield It rose to a 15-year high of 5% on Monday ahead of the expected announcement of another 25 basis point rate hike on Thursday.

From November 2021, the central bank has started a series of increases to take its base rate from 0.1% to 4.5%, and market prices now suggest that it could reach 5.75% at the the end

Core CPI inflation came in at 8.7% year-on-year in April, down from 10.1% in March, but core CPI (which includes volatile energy, food, alcohol and tobacco prices) increased 6.8% compared to 6.2% in the previous month. .

The Organization for Economic Co-operation and Development predicted earlier this month that the UK will post annual headline inflation of 6.9% this year, the highest among all advanced economies.

Adding to policymakers’ headaches, last week’s labor market data came in much stronger than expected. Unemployment defied expectations to fall back to 3.8% and the inactivity rate also fell by 0.4 percentage points.

Regular pay growth (excluding bonuses) was 7.2% in the three months to the end of April compared with a year earlier, also above consensus forecasts. Growth in regular private sector pay, the Bank’s key metric, hit 7.6% year-on-year.

On economic activity, May PMIs measured slightly below consensus but remained in expansionary territory, with UK gross domestic product not expected to contract by 0.3% month-on-month in March before rebounding somewhat with 0.2% growth in April.

Completion rate projections were constructed

In a research note on Thursday, Goldman Sachs Chief European Economist Sven Jari Stehn said that while there is still some uncertainty surrounding Wednesday’s CPI release, there is a “significant hurdle” for the Bank of England to consider required to add their walking increments to a base of 50. points.

Stehn pointed out that “inflation expectations are still anchored, recent comments have shown that there is no desire to increase the pace and there will be no press conference or new projections at the meeting.” “

“We look for the MPC to maintain its moderate assessment that inflationary pressures will cool as core inflation eases, but recognizing the more recent data and noting that risks to the inflation outlook are still largely shifted to the upside. We also expect the MPC that released guidance to remain unchanged,” Stehn said.

Goldman Sachs expects the MPC to maintain its rather dour stance of steady growth, sticky wage pressures and high core inflation, and continue to be pushed into a further 25 point hike by stronger-than-expected data, at its ‘ ultimately reaching a closing level of 5.25% with upside risks.

BNP Paribas economists also expect a 25 basis point hike on Thursday, as inflation expectations remain lower than when the Bank was raising rates in 50 basis point hikes last year.

The French lender also upgraded its closing rate forecast to 5.5% in a note last week, from 5% previously, in response to “clear evidence of more stable inflation.”

While the tightening cycle is expected to be longer than expected to reel in inflation, BNP Paribas suggested the MPC would be “wary of excessive tightening” and will look to gauge how rate hikes are expected to this affects families, especially as fixed-rate mortgage renewals go in during the second and third quarters.

UK mortgage lenders are being pushed to the brink as rising borrowing costs hit contract renewals and products are pulled from the market.

Laith Khalaf, head of investment analysis at AJ Bell, said the MPC is “caught between a rock and a hard place” as it chooses between pushing more mortgage borrowers to the brink and letting inflation run riot. run

“Current interest rate pricing is setting alarm bells ringing in the market, but some mix-up in inflationary pressures over the summer would add some balm to the situation. The Bank of England will also be aware that the full force of the tightening so far remains. working his way through the economy,” Khalaf said.

“Having said that, if the inflation data remains ugly, the Bank will be under pressure to act, and so will the Treasury, if the Prime Minister’s promise for inflation is likely to cut to a point at risk of falling short.”