Another interest rate increase is anticipated from the Bank of England governor Andrew Bailey and his band of monetary policy committee (MPC) members this coming Thursday, with a debate over whether it will be the last of the current hiking cycle.
A quarter-point rate rise is predicted by the markets, taking the headline base rate ticking up to 4.5% and another split vote from the committee is also widely expected, with a 7-2 vote at the last meeting in March.
While the MPC knows this is already putting the mockers on some aspects of the economy and has said several times that its appetite for further rate increases is fading, yet its priority is cutting inflation down to size, last seen still topping 10%, and supposed to be close to 2%.
While the US Federal Reserve last week suggested it might be done with rate moves for now, markets are predicting another 0.25bps hike from the MPC in August and another in September to take the base rate to a peak of 5%.
Then, based on the current rate swaps market, Bailey and co are expected to march interest rates some of the way back down – not necessarily Grand Old Duke of Threadneedle Street – with 0.25% rate cuts currently expected in February and March 2023.
“While at the last meeting in March, the MPC's tone around the inflation outlook turned more balanced/dovish, we think that the incoming data since then have not eased the MPC's concerns around inflation persistence,” said UBS economist Anna Titareva.
Indeed, the near-term outlook for growth and inflation is likely to be revised higher in the BoE staff projections, said Rabobank macro strategist Stefan Koopman, who predicts a peak rate of 4.75% later this year.
“The economy needs to slow down to force firms to accept lower prices given wages and prices of other firms, and workers to accept lower wages given prices and wages of other workers. But the economy is picking up instead of slowing down,” Koopman said.
The economy is "effectively overheating", said Alex Brazier, deputy head of Blackrock Investment Institute, with the MPC needing to decide "what price it is willing to pay" to put the brakes on the UK economy and bring inflation down.
Aside from the immediate policy rate decision, the focus at the meeting will be on the policymakers’ signals for the future rate path, said Titareva.
“With inflation and wage expectations pointing to gradual easing and high uncertainty about the impact of the already delivered tightening, our current baseline foresees no further hikes beyond May.
“However, we see a significant risk of at least one more 25bp hike on 22 June,” she said, noting that there are a number of key data releases before the June meeting, including labour market on 16 May and 13 June, inflation on 24 May and 21 June, as well as various survey indicators.
She expects the MPC will stress the next moves will be dependent on the data.
Brazier said the market will want more guidance from Bailey and co.
"The Bank faces this difficult trade off," he told BBC Radio on Thursday morning. "The UK has had a reasonably big labour supply shock. The economy is effectively overheating and so if the Bank wants to bring inflation down quickly, it has to generate some sort of growth weakness or continued growth weakness.
"How much growth weakness is it looking to tolerate? What price is it willing to pay to bring inflation down? That's the thing where the market could do with a bit more guidance."
*** UPDATE: Adds details, quote ***