Bank of England Raised Rates Again & Remained Non-Committal

12th Straight Rate Hike

The Bank of England raised rates today by 0.25%, as widely expected, to 4.5% and the highest level since late-October 2008, in its effort to bring inflation down to the 2% target [1]. This was the twelfth consecutive move since the December 2021 lift-off, with cumulative tightening of 440 basis points.

Policymakers seem to have been reluctantly hiking recently and once again, there were two dissenters (7-2 split) in a favor of a hold. Communication was murky in typical BoE fashion and official remained non-committal as to the next steps. They repeated that further tightening "would be required" if there were evidence of more persistent price pressures.

High Inflation & Tight Labor Market

The cost of living has been very high in the United Kingdom, forcing the central bank to this prolonged contractionary monetary approach. Even though inflation has been cooling, the Consumer Price Index (CPI) stayed above 10% y/y in March.

The Committee expects CPI to fall sharply from April, but today's forecasts were upgraded and risks are "skewed significantly to the upside". Inflation is now projected to ease to 5% this year (from 4% in the previous forecast) and to 2.25% in 2024 (from 1.5% previously expected).

Wages meanwhile have remained elevated, making the effort of bringing inflation back to 2% target. Although there are indications that the labor market "has started to loosen", it is expected to be "tighter" than previously thought. According to today's projections, it will stay below 4% this year, a mark that it will hit in 2024.

No Recession

The UK economy has been in a rough shape, but things seem to have been lees bad than feared. It managed to eke out 0.1% q/q GDP growth in Q4, avoiding a back-to-back contraction. The bank of England judges that "the path of demand is likely to be materially stronger" than previously expected.

It does not see a recession anymore, forecasting 0.25% expansion this year (from a 0.5% contraction previously) and growth of 0.75% in 2024 (from -0.25% previously). The International Monetary Fund (IMF) upgraded its forecast last month, but still expects a contraction of 0.3% for the UK in 2023. [2]

More Firming Still In Play

The Bank of England is known for offering murky guidance as it tries to balance between economic slowdown and the high cost of living, with today's decision not being the exception, since it did not commit to more hikes nor a pause.

It expects inflation to fall, but far slower than before and upgraded the GDP forecasts, which are conditioned on rates peaking at 4.75% in Q4 2023, from 4.5% currently. These factors show that there is still room for more tightening, but even if not yet there, the bank appears to be close to the end.

Nikos Tzabouras

Senior Market Specialist

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 11 May 2023 https://www.bankofengland.co.uk/monetary-policy-report/2023/may-2023

2

Retrieved 26 May 2023 https://www.imf.org/en/Publications/WEO/Issues/2023/04/11/world-economic-outlook-april-2023

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