abrdn: BoE does not want to surprise the market

abrdn: BoE does not want to surprise the market

12 december 2022

Centrale bank Verenigd Koninkrijk
Engelse pond.jpg

Luke Bartholomew, Economist at abrdn, comments on this week's BoE meeting.

The decision facing the Bank of England at its next meeting is whether to hike rates by 50bps or 75bps. However, the distribution of votes among the Bank’s Monetary Policy Committee is likely to show an even wider spread of possible outcomes, reflecting the difficulties of balancing the many different shocks hitting the UK economy.

While the economy is clearly slowing, there has been little evidence that underlying inflation pressures are receding. Wage growth is running ahead of the Bank’s forecasts, and services inflation seems to be strengthening. The labour market, while a lagging indicator, has shown little sign of the sustained cooling needed to bring underlying inflation under control.

We are unconvinced by the framing of the 75bps hike in November as a one-off emergency move. Indeed, there is little reason to think a single 75bps move is sufficient to re-anchor inflation expectations.

However, the fact that the Bank has done little to guide the market toward pricing a 75bps move in December is probably the strongest reason to think a slowdown to 50bps is coming. The Bank may be loath to surprise the market, especially in a hawkish direction, when it has been trying to manage down long run rate expectations.

Either way, we continue to expect Bank Rate to rise to a terminal level of 4.5% next year. This is broadly consistent with market pricing, after a large downward repricing over the last month. The majority of Bank policy makers probably still think this is excessive, but this meeting is unlikely to see anything like the degree of pushback against the market that we saw in November.

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