Forecast: will the Bank of England stick or twist over interest rates at May MPC meeting?

Businesses and borrowers will be poised to this week hear the Bank of England’s next decision on interest rates, although one analyst has blasted its economic policy as being “about as useful as a chocolate teapot”.

The central bank’s monetary policy committee (MPC) is meeting on Thursday May 11, expected by many to lift the base rate to 4.5 per cent, after in March voting 7-2 to up it to 4.25 per cent from 4 per cent in March. Last week, the European Central Bank increased its main deposit rate by a quarter point to 3.25 per cent, while the Federal Reserve upped its key interest rate by the same proportion to between 5 per cent and 5.25 per cent.

Amid UK inflation having reached 10.1 per cent in March, albeit down from 10.4 per cent in February, Russ Mould and Danni Hewson, investment director and head of financial analysis respectively at AJ Bell, said: “Markets believe inflation is the priority, especially as it stands some five times higher than the Bank of England 2 per cent target and unemployment is low. They are therefore pricing in a quarter-point rate rise at this meeting of the MPC to 4.5 per cent, followed by another quarter in August and one more in September to take the base rate to 5 per cent. That is expected to be the peak, with 0.25 per cent rate cuts currently expected in February and March 2023.”

Luke Bartholomew, senior economist at Abrdn, said: “The strength of recent inflation and wage growth data means the Bank of England is set to hike rates by 25 [basis points] next week. This is likely to be the last hike of this cycle, with many policy makers growing uncomfortable about how rapidly policy has been tightened.

'The Bank of England’s stewardship of monetary policy over the last 12 months has been about as useful as a chocolate teapot,' says one economic expert. Picture: Cate Gillon/Getty Images.

“Despite some recent signs that growth is starting to pick-up, we think the economy will endure recession-liked conditions for much of this year. Much of the lagged impact of the BoE’s extensive monetary tightening is yet to be felt, and real income growth continues to be extremely weak.”

He and his team expect the US economy to tip into recession later this year, affecting the UK. “As such, we expect debate to quickly turn to the extent of the UK’s monetary easing cycle, and continue to think rates will be cut well in excess of what is priced by markets.”

Criticism

Michael Hewson, chief market analyst at CMC Markets UK, is also forecasting another quarter-point hike this week, and another split decision – while he did not hold back in his criticism of Threadneedle Street’s strategy.

“It has become abundantly clear over the last few months that the Bank of England’s stewardship of monetary policy over the last 12 months has been about as useful as a chocolate teapot,” he said. “From tone-deaf utterances from the likes of Bank of England governor Andrew Bailey about wages, and his chief economist Huw Pill, who recently said that UK consumers would have to get used to a lower standard of living because of persistently high levels of inflation, or risk rates staying higher for longer, its likely we will see another 25bps rate hike this week… Under current conditions it’s hard to see rates coming down much before the middle of next year.”