London, United Kingdom. The Bank of England is expected to keep interest rates on hold this week while assessing potential damage to Britain’s economy from the Iran war. Investors will watch for any signals that the central bank is moving toward raising rates.
Expected decision and vote split
The BoE kept borrowing costs unchanged in March as it waited to gauge the inflation and growth effects of the conflict. With uncertainty still high, another no-change decision is expected on Thursday.
Economists polled by Reuters last week mostly expected an 8-1 vote by the Monetary Policy Committee to keep Bank Rate at 3.75% this week, after March’s 9-0 vote. Unlike financial markets, most economists surveyed do not foresee rate hikes this year.
Market pricing and policy debate
Investors say rate increases are likely later this year. On Friday, markets fully priced a quarter-point increase in July, another in September, and a small chance of a third by year-end, despite Governor Andrew Bailey warning that such moves would be premature.
Those bets could intensify on Thursday if some MPC members judge that the risk of another bout of high inflation warrants a rate increase now, with inflation having surpassed 11% in 2022.
Some analysts said as many as three policymakers might call for Bank Rate to rise to 4.0% to prevent a jump in headline inflation from feeding into wage demands and company pricing.
Energy prices and inflation outlook
Investors view Britain’s economy as particularly vulnerable to the rise in energy prices caused by the war because of the country’s heavy use of natural gas.
Data published last week showed a jump in firms’ input costs and companies raising their expectations for price increases over the next 12 months at a record pace.
Earlier this month, the International Monetary Fund predicted British inflation, the highest in the Group of Seven for much of the last four years, would peak at 4% this year.
Comments from BoE officials
Challenging Bailey’s view that it is too early to know the inflationary impact of the war, BoE Chief Economist Huw Pill said on April 17: “If you’re waiting and seeing and you don’t see, then you’ve just waited.”
What signals will you be watching for in the Bank of England’s statement and vote split this week?
