August 12, 2022 | 16:39
Will the BoE Hike a Lot or a Little?
While a round of milder U.S. inflation readings this week prompted discussion about whether the Fed will slow things down or end its rate hikes early, a few other central banks kept the faith and barrelled ahead. Armed with an over two-decade high inflation rate, Banxico’s board members unanimously agreed to push the benchmark rate up 75 bps (again) to a record-high 8.5%. Argentina increased its main rate by a whopping 950 bps to 69.5%, with the intention to knock down the surging inflation rate, which is estimated to hit—gulp—90% by year-end. Finally, for the 13th meeting in a row, Peru lifted its key rate, this time by 50 bps to 6.5%.
But one of the bigger mysteries revolves around what the Bank of England decides to do in September. Here’s how we see things playing out. At its most recent meeting in early August, all but one of the nine members of the MPC voted to raise rates 50 bps to 1.75%, the biggest hike in nearly three decades. The Bank also raised its expectation on inflation once again as it looks for CPI to hit 13.3% in October, which is above its previous calls over the course of the year. However, like everywhere else, growth is slowing. Along with the U.S. and Germany, real GDP in the U.K. contracted in the second quarter. But, unlike everywhere else, the central bank officially expects a recession, one which should begin in 2022Q4 and last over a year, led by a decline in consumer spending as real income is forecast to “fall sharply” in 2022 and 2023. But the Bank is “not on a pre-set path” for policy.
It’s a tough decision. However, the relentless reminders from Bank officials that “the inflation target applies at all times”, in the face of all of these economic headwinds, suggest that the MPC will be front-loading rate hikes. This makes us lean towards another 50 bp hike in September.