The Bank of England (BoE) is expected to raise UK interest rates further in the second quarter of 2022 as the UK central bank tries to stem soaring prices pressures. The BoE has already lifted the Bank Rate to 0.75% from 0.1% in late 2021 and money markets are currently pricing in 125 basis points of additional rate hikes this year. The latest Office for National Statistics (ONS) inflation release showed headline inflation hitting 6.2% in February, a fresh 30-year high, while core inflation rose to 5.2% from 4.4% in January. And even higher levels of inflation are expected in Q2 this year. The latest BoE monetary policy release shows that the UK central bank expect headline inflation to top 8% in the coming months, citing sky high energy and food prices as the main drivers of the move.
Source: TradingEconomic.com
The UK central bank recently pushed back against these market expectations, fearing that a series of hikes may stall growth in the months ahead. UK growth is now back above pre-covid levels and looks robust, despite fears that the Ukraine crisis, and Russian sanctions, will cause further supply chain disruptions. The latest BoE monetary policy report noted that while business confidence and labour market activity have remained robust, ‘consumer confidence has, however, fallen in response to the squeeze on real household disposable incomes’. It is this worry that a downturn in consumer spending will slow economic activity in the months ahead, especially with inflation expected to hit, and stay at, multi-decade highs. According to the BoE, UK GDP is now expected to be flat for Q1, compared to 1.1% in Q4 2021. The chart below shows that the central bank’s inflation expectations from the February MPC meeting are already on the low side.
Source: ONS and Bank
