Bank of England hike incoming at midday – how high is the question

The Bank of England’s monetary policy committee (MPC) will at midday today unveil the 13th interest hike in a row as they look to get a grip on inflation that has remained stubbornly high.

Yesterday’s inflation figures delivered unwanted surprises, with the consumer price index remaining at 8.7% and core CPI rising to a 31-year high of 7.1%.

The UK base rate is currently 4.5% after the MPC hiked by a quarter of a percentage point at the meeting in May.

A rise to 4.75% had been widely expected before the CPI release, but some economists are now predicting a move to 5.0% today, with odds on further hikes also moving as a result of the stubborn inflation figures.

“It’s difficult to stress just how bad that UK release was yesterday,” said economist Jim Reid at Deutsche Bank (ETR:DBKGn), noting that both headline and core CPI surprising on the upside for a four consecutive month and leaving the UK an outlier with the highest inflation in the G7 by some margin.

Markets have started to fully price in a move to 6% bank rate over the coming months from BoE boss Andrew Bailey and his colleagues, returning to the levels seen after the ‘mini budget’ turmoil last September, while data yesterday also revealed UK debt-to-GDP ratio surpassed 100% of GDP in May for the first time since March 1961.

Reid said current market pricing is suggesting there’s a 37% chance of a hiked to 5.0% today.

“But looking over the June and August meetings together, we’ve got 76bps of rate hikes priced, so that implies markets are fully pricing in a larger move for one of the next two decisions.”

Whatever the MPC does today it’s not expected to be a unanimous decision, said market analyst Michael Hewson at CMC Markets.

“In the absence of a press conference to explain their actions a 50bps rate move would be a risky strategy, as it could signal they are panicking. A more measured response would be to hike by 25bps with a commitment to go more aggressively at the next meeting if the data warrants it.

“The big problem the bank has is that they won’t get to see the July inflation numbers, when we could see a big fall in headline CPI, until after they have met in August, putting us into the end of Q3 until we know for certain that inflation is coming down.”