The Bank of England will anounce changes to interest rates at midday, with speculation alive about not only the size of the hike but the ton of guidance about the coming months too.
After being more cautious than its transatlantic cousin in terms of increasing rates and tightening measures, from 0.25% to 3.50% last year, but this time it will go further, with a second consecutive 50bps hike to 4.0%.
Similar to the December meeting, there is expected to be a split of opinions on the monetary policy committee (MPC) due to mixed signals on the inflation outlook, said UBS.
“On the one hand, the incoming data since the last meeting signals better-than-expected activity in Q4, a cooling but still tight labour market, and sticky core inflation, which is likely to reinforce concerns amongst the more hawkish MPC members about inflation persistence,” said economist Anna Titareva.
“On the other hand, a sharp drop in gas prices (down 44% compared to December average) implies that if gas prices were to stabilise at current levels, retail gas and electricity prices could start falling in H2, and bring inflation down faster than the MPC previously expected, as was recently acknowledged by Governor Bailey.”
Overall, economists expects the MPC make a couple of quarter-point hikes to a peak of 4.50%, though bond markets are sceptical of that, with the two-year UK gilt yield currently at 3.46%.
“This yield has a history of leading the Bank of England Base Rate by six to nine months, which suggests that the bond markets think rates may peak and then be cut sooner than expected,” said AJ Bell investment director Russ Mould.
Capital Economics’ Paul Dales sees rates subsequently rising to 4.50% but thinks “markets will be surprised by how fast interest rates are cut in 2024”.