The Bank of England will likely raise its key interest rate by a quarter point on Thursday, declining to follow the Federal Reserve’s move of standing still for a meeting to wait for more data.
Most economists expect the U.K. central bank will lift its key rate by a quarter point to 4.75%. That would be the 13th consecutive increase after starting with rates close to zero in December 2021.
There’s a chance of an even bigger half-point hike after inflation came in hotter than expected for May. The annual rate of price gains held at 8.7%, more than four times higher than the BoE’s 2% target. By comparison, the U.S. inflation rate is around 4%.
The gap explains why the U.K. can’t afford to mimic the Fed. Not only has headline inflation come down more slowly than anticipated, but services inflation is still picking up and wage gains are accelerating. That raises worries that inflation is becoming embedded in the economy, adding to the urgency of forceful action from the central bank.
The inflation number “all but guarantees another rate hike from the Bank of England,” said James Smith, an economist at ING. “Markets are now fully pricing a 6% peak for the bank rate, which implies six more rate hikes from current levels. That seems excessive, and we suspect the Bank of England would privately agree.”
Like the Fed, the BoE has warned that past interest-rate increases take time to have their full effect. That’s particularly true in the U.K., where a substantial number of homeowners with mortgages are will refinance imminently. Many two-to-five-year low-rate deals that were struck before rates started rising are coming up for renewal.
Write to Brian Swint at brian.swint@barrons.com
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