The Bank of England is expected to raise interest rates by another 25 basis points on Thursday, according to market expectations, but the decision is likely to be non-unanimous, and it is unclear what will happen after Thursday.
The current Bank Rate stands at 4.50 percent.
“The latest inflation figures were disappointing, and wage growth shows some dynamics,” said economist Luc Aben from Van Lanschot Kempen.
“UK inflation seems to be even more persistent than that of the United States or the eurozone. Brexit is often cited as an explanation for this. It has a negative impact on the supply of foreign labor. The slower British response to cap energy prices is also considered a partial explanation,” the economist added.
“For months, Bank of England policymakers have consistently underestimated the persistence of inflationary trends,” added market analyst Michael Hewson from CMC Markets.
Core inflation reached 6.8 percent in April, the highest level since the early 1990s. New inflation figures will be released on Wednesday, a day before the British interest rate decision.
Hewson expects a non-unanimous decision within the policy committee. Board members Silvana Tenreyro and Swati Dhingra are likely to vote against an interest rate hike again. However, this will be Tenreyro’s last meeting as a board member, which is expected to reduce the number of dissenting votes in the coming months, according to Hewson.
ING expects a 25 basis point interest rate hike on Thursday, along with “vague indications of what is likely to come next,” wrote the economists in their outlook.
ING points out that the market is currently pricing in around 6 interest rate hikes for the coming months, with an expected terminal rate of around 6.00 percent.
The Japanese bank Nomura finds this expectation “excessive.” ING also believes that 6 interest rate hikes are “unlikely.” If there are no major surprises in service sector inflation, “a peak of 5 percent for the Bank Rate seems reasonable to us,” according to ING. That would imply one more interest rate hike after Thursday.
According to Aben from Van Lanschot Kempen, the interest rate expectation for the UK differs from that of the US and the eurozone. “In those regions, the markets aim for a final rate that matches or is below the central banks’ plans. It is the opposite in the UK,” the economist stated.
The Bank of England will announce its interest rate decision at 13:00 on Thursday.
