SNAPSHOT2 min read

Bank of England hikes interest rates again as it struggles to tame inflation

Inflation remains the central bank’s main concern as it signals that it still has work to do.

03-23-2023
UK interest rates

Authors

Azad Zangana
Senior European Economist and Strategist
George Brown
Senior US Economist

The Bank of England’s (BoE) monetary policy committee (MPC) raised interest rates by a further 0.25% to 4.25%, meeting consensus expectations. This was down from the 0.50% increase at its previous meeting, when it said that a further deterioration in the inflation outlook would be needed to raise rates further. However, since then the collapse of Silicon Valley Bank and the forced bail-out of Credit Suisse have led to concerns about the global banking sector. Yet, these risks appear not to have swayed the committee.

Minutes showed that its sister financial policy committee (FPC) had concluded that the UK banking system “remained resilient” and that it “was well placed to continue supporting the economy in a wide range of economic scenarios”. But with bank wholesale funding costs having risen globally, the MPC pledged that it would “continue to monitor closely any effects on the credit conditions faced by households and businesses”.

Inflation remains monetary policy committee’s main concern

For the time being, inflation remains the committee’s main concern. Food and core goods inflation have both proven significantly stronger than the BoE had projected. But the latter had been largely due to higher clothing and footwear prices, which the MPC noted had tended to be volatile. But at the same time, the persistent tightness of the labour market has led the committee to now expect the unemployment rate to be flat in the coming months rather than rise.

Most of the MPC therefore considered that the recent strength in domestic demand could be being driven by factors “over and above” falling energy prices, noting that the recent strengthening had partly preceded the falls in prices. And that renewed and sustained labour demand could further entrench the current high rate of inflation. Conversely, the two members who voted to leave rates unchanged placed greater weight on the assumption that prior sizeable rate increases were yet to filter through to the wider economy due to delays associated with monetary policy.

Further hikes could lead to a sharper fall in house prices

Looking ahead, the lack of consistency in the BoE’s communication is troubling. Markets are pricing in another 0.25% rate rise in June. While further rate rises would help bring the UK’s inflation rate back towards target faster, it also increases the risk of a sharper fall in house prices. The UK gilt market could also come under pressure as the government is borrowing more than most other advanced economies, just as the BoE is selling the stock of its gilts holdings back to the market.

But based on the messaging presented today, our expectation is that there is at least one further rate hike left to come. Once again, the MPC stated that if there was evidence of more persistent inflationary pressures then further policy tightening was likely to be required. Given that the labour market looks set to remain resilient in the coming months, we expect the MPC to sanction another 0.25% hike in May, with any further rate rises conditional on domestic and global developments.

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.

Authors

Azad Zangana
Senior European Economist and Strategist
George Brown
Senior US Economist

Topics

Please consider a fund's investment objectives, risks, charges and expenses carefully before investing. The Schroder mutual funds (the “Funds”) are distributed by The Hartford Funds, a member of FINRA. To obtain product risk and other information on any Schroders Fund, please click the following link. Read the prospectus carefully before investing. To obtain any further information call your financial advisor or call The Hartford Funds at 1-800-456-7526 for Individual Investors.  The Hartford Funds is not an affiliate of Schroders plc.

Schroder Investment Management North America Inc. (“SIMNA”) is an SEC registered investment adviser, CRD Number 105820, providing asset management products and services to clients in the US and registered as a Portfolio Manager with the securities regulatory authorities in Canada.  Schroder Fund Advisors LLC (“SFA”) is a wholly-owned subsidiary of SIMNA Inc. and is registered as a limited purpose broker-dealer with FINRA and as an Exempt Market Dealer with the securities regulatory authorities in Canada.  SFA markets certain investment vehicles for which other Schroders entities are investment advisers.”

For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security/sector/country.

Schroders Capital is the private markets investment division of Schroders plc. Schroders Capital Management (US) Inc. (‘Schroders Capital US’) is registered as an investment adviser with the US Securities and Exchange Commission (SEC).It provides asset management products and services to clients in the United States and Canada.For more information, visit www.schroderscapital.com

SIMNA, SFA and Schroders Capital are wholly owned subsidiaries of Schroders plc.