The Bank of England’s quandary intensifies as inflation and the job market remain hot.

LONDON (AP) — According to experts, the Bank of England is “caught between a rock and a hard place” as it prepares for a critical monetary policy decision against a backdrop of sticky inflation and a tight labor market.

The Consumer Price Index (CPI) for May will be released Wednesday morning, the day before the Bank’s Monetary Policy Committee (MPC) makes its next interest rate change.

Data since the previous meeting have shown ongoing labor market tightness and substantial underlying price pressures, as well as varied but surprisingly resilient economic momentum.

Economists now expect the Bank to extend its tightening cycle and raise interest rates higher than previously predicted.

British 2-year government bond rates hit a 15-year high of 5% on Monday, ahead of Thursday’s expected announcement of another 25 basis point rate hike.

Since November 2021, the central bank has gradually increased its base rate from 0.1% to 4.5%, with market pricing indicating that it may ultimately reach 5.75%.

Headline CPI inflation in April was 8.7% year on year, down from 10.1% in March, although core CPI (which excludes volatile energy, food, alcohol, and cigarette prices) climbed by 6.8%, up from 6.2% the previous month.

The Organization for Economic Cooperation and Development forecasted earlier this month that the United Kingdom will see annual headline inflation of 6.9% this year, the highest amount among major nations.

Last week’s job market statistics came in significantly stronger than expected, adding to policymakers’ collective concern. Unemployment fell below estimates to 3.8%, but the inactivity rate declined by 0.4 percentage points.

Regular wage increase (excluding incentives) was 7.2% year on year in the three months to the end of April, beating consensus predictions. The Bank’s core statistic, regular private sector pay growth, increased 7.6% year on year.

In terms of economic activity, May PMIs were somewhat lower than predicted but still in the expansionary zone, while UK GDP unexpectedly dropped by 0.3% month on month in March before partially recovering with 0.2% growth in April.

Forecasts for terminal rates have been raised.
In a research note issued Thursday, Goldman Sachs Chief European Economist Sven Jari Stehn stated that, while there is some uncertainty around Wednesday’s CPI announcement, the Bank of England must overcome a “high hurdle” before increasing its hike increments to 50 basis points.

“Inflation expectations have remained anchored,” Stehn said, “recent comments have signaled no appetite for stepping up the pace, and the meeting will have no press conference or new projections.”

“We expect the MPC to maintain its modal assessment that underlying inflation pressures will cool as headline inflation falls, but we note that risks to the inflation outlook remain significantly skewed to the upside.” “We also expect the MPC to maintain its loose forward guidance,” Stehn added.

Given resilient growth, sticky wage pressures, and high core inflation, Goldman Sachs expects the MPC to maintain its relatively dovish stance, and to be pushed into more 25 basis point hikes by stronger-than-expected data, eventually reaching a terminal rate of 5.25% with risks skewed upward.

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BNP Paribas economists predict a 25 basis point increase on Thursday since inflation forecasts remain lower than they were last year when the Bank raised rates in 50 basis point increments.

In a letter issued last week, the French lender raised its terminal rate projection to 5.5% from 5% before, citing “clear evidence of more persistent inflation.”

Though the tightening cycle is expected to be longer than higher in order to rein in inflation, BNP Paribas suggested the MPC would be “wary of over-tightening” and will be looking to gauge how rate rises to date affect households, particularly as fixed-rate mortgage renewals arrive in the second and third quarters.

Rising borrowing prices are putting pressure on agreement renewals in the United Kingdom, and items are being taken off the market.

According to Laith Khalaf, head of investment analysis at AJ Bell, the MPC is “caught between a rock and a hard place” as it decides between driving more mortgage debtors down the cliff and allowing inflation to run wild.

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“Current interest rate pricing reflects market alarm bells ringing, but some relief from inflationary pressures over the summer would be welcome.” “The Bank of England will also be aware that the full force of its tightening is still working its way through the economy,” Khalaf added.

“However, if inflation data continue to be dismal, the Bank will be under pressure to act, as will the Treasury, if it appears that the Prime Minister’s pledge to halve inflation is at risk of falling short.”

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