Inflation pressure to test Bank of England’s patience at key meeting, economists warn

Economists broadly expect the Bank of England’s Monetary Policy Committee to raise its inflation forecasts on Thursday after two straight months of overshoots. However, investors should not expect a hawkish shift, and economists at several major European banks are expecting the BOE to strike a cautiously optimistic tone while leaving its quantitative easing program and interest rate stance in place.

The U.K.’s consumer price index was up 0.5% month-on-month in June, the latest available reading, well ahead of consensus expectations and representing the highest annual acceleration since May 2018. The BOE has projected that inflation will peak above 3% by the end of 2021 as the economy rebounds from its historic pandemic-induced decline in 2020. Yet, most policymakers are yet to see sufficient evidence that the inflation overshoots will be anything other than transitory.

ING does not expect any wholesale changes to the Bank’s medium-term growth outlook, which sees GDP reaching pre-pandemic levels in the fourth quarter. Smith and Bouvet expect the Bank to scale back its third-quarter growth forecast, however, to between 1.5% and 2%, down from 3.8%.

Daily new cases of Covid-19 in the U.K. have been in steady decline since a recent peak last month due to the surge of the highly transmissible delta variant. However, rising cases around the world and the lagged effect of England’s total easing of containment measures may offer cause for caution with regards to any hawkish pivot. Economic activity took a hit in July as large swathes of the population were instructed to self-isolate due to the surge in cases.

As it stands, the BOE is expected to finish expanding its balance sheet at the end of the year. BNP Paribas still sees the BOE hiking interest rates sooner than other major central banks, forecasting a hike in August 2022 with risks skewed toward earlier tightening of monetary policy.

Inflation pressure to test Bank of England’s patience at key meeting, economists warn, CNBC, Aug 4