Economists Split on Bank of England’s Next Move as Data Presents Conflicting Signals

LONDON — The market is divided on the Bank of England’s next monetary policy move on Wednesday as policymakers grapple with inflation. As of Tuesday morning, the market gave a 62% probability that the Monetary Policy Committee (MPC) will raise interest rates by 25 basis points, taking the main Bank rate to 5.25%, according to Refinitiv data. The remaining 38% of market participants expect a consecutive 50 basis point increase, following the bank’s surprise move in June. While UK inflation is showing signs of easing, it remains higher than in other advanced economies and above the Bank’s 2% target.

Headline consumer price inflation declined to 7.9% in June from 8.7% in May, while core inflation, which excludes volatile energy, food, alcohol, and tobacco prices, remained stable at an annualized rate of 6.9%, but was lower than the 31-year high of 7.1% in May. Additionally, data from the British Retail Consortium revealed a cooling in annual shop price inflation from 8.4% in June to 7.6% in July, with a decline in month-on-month terms, suggesting that the country may be emerging from its prolonged cost-of-living crisis.

Despite 13 consecutive rate hikes by the Bank of England, the British economy has demonstrated unexpected resilience. Although UK GDP remained stagnant in the three months leading up to May, a recession is no longer anticipated. Goldman Sachs highlighted three indicators of inflationary persistence that the MPC will consider for determining the extent of further monetary policy tightening: slack in the labor market, wage growth, and services inflation. The bank’s European economists noted that while jobs activity decreased in May, wage growth in the private sector remained strong, reaching 7.7%. Services inflation also showed momentum in June. Due to the limited guidance provided by BoE officials since the June meeting, Goldman Sachs predicts a “close call” at this week’s meeting, but suggests a 25 basis point increase is more likely than a half-point hike, with an expected 8-1 split vote in favor of the rate increase.

Barclays believes that a half-point rate increase is likely, given the high wages and core inflation, providing an opportunity for the MPC to enhance its credibility through decisive action. BNP Paribas economists also support this view, anticipating a “front-loading” of tightening based on Governor Andrew Bailey’s comments at the Sintra central bank conference. Bailey’s justification for the jumbo increase in June was based on his belief that if additional evidence suggested a need for another 25 basis point increase, it would be better to implement a 50 basis point increase. However, data leading up to this week’s meeting, including weak flash PMI, non-committal messaging from the US Federal Reserve and the European Central Bank, and declining market expectations for the August meeting, favor a 25 basis point increase.

Looking ahead, Goldman Sachs acknowledges the progress made in rebalancing labor market supply and demand but believes that further rate increases are necessary to achieve the Bank’s 2% inflation target. They expect incremental 25 basis point increases, potentially reaching a peak rate of 5.75%, as long as wage and services inflation remain high.