The Bank of England is expected to raise interest rates by 50 basis points on Thursday.

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LONDON – The Bank of England faces the unenviable task of managing a slowing economy, sky-high inflation and an extremely tight labor market.

Markets are broadly pricing in a 50 basis point increase in key bank rates to 3.5%, a slowdown from November’s 75 basis point hike, the biggest in 33 years.

Annual growth in UK consumer prices eased to 10.7% in November after hitting a 41-year high in October, new data showed on Wednesday. The slowdown in other major economies such as the U.S. and Germany has prompted signs that inflation may be peaking, albeit uncomfortably high and above the central bank’s 2% target.

The Monetary Policy Committee is expected to maintain the task of pulling inflation back to its target for a weakening economy beset by a range of unique domestic pressures and global headwinds.

This follows the latest UK labor market data released earlier this week, which showed a sharp rise in both unemployment and wage growth, while rates of economic inactivity and long-term sickness are also at historic highs.

The UK expects widespread industrial action over the festive period as workers demand a pay rise linked to inflation.

In a note on Friday, Barclays economists predicted a split vote among the MPC in favor of another 50 basis point hike, a continuation of the bank’s quantitative easing efforts and a change in transmission guidance.

The British lender forecasts two further hikes of 50 basis points and 25 basis points at the February and March meetings, bringing the terminal bank rate to 4.25% at the end of this tightening cycle.

The bank launched a sale of British government bonds in October and hopes to reduce its balance sheet by 80 billion pounds ($99 billion) over a 12-month period through 40 billion pounds of asset sales and reinvestments. Maturity securities.

Barclays expects these quantitative tightening targets to remain unchanged, but suggests the MPC may adjust its guidance going forward. In its last meeting, the bank took the unusual step of directly opposing the market rate at the benchmark level.

Silvia Ardagna, Barclays’ chief European economist, believes the MPC will re-emphasize the pre-November peak while displacing current inflation, which has since eased significantly.

Inflation is peaking, but more work is needed.

While the latest GDP and inflation figures have offered somewhat positive surprises, Gurpreet Gill, macro strategist at Goldman Sachs Asset Management, said broad-based inflation means the bank is unlikely to come off the brakes anytime soon.

“The key driver of services inflation is wage growth of around 6%, more than double the Bank’s forecast of 2% inflation,” she said.

“Structural supply problems from an aging population, lower migration, higher retirements and an increase in long-term illness following the pandemic point to a wage growth dilemma.”

GSAM sees further increases in early 2023 based on the bank’s assessment of inflation, particularly from mid-2023 and early 2024.

We are still positive about the UK, but it is heading for a deep recession, said the chief economist

S&P Global Market Intelligence’s CPI release on Wednesday showed that inflation has peaked after several turbulent months, focusing on when and how quickly inflation will start to decline.

“We expect inflation to remain subdued in the first half of 2023, with continued damage to consumer confidence and real incomes,” said Raj Badiani, chief economist at S&P Global Market Intelligence.

“Furthermore, the pressure on real wages remains constant, with public sector workers facing a once-in-a-lifetime reduction in living standards.”

S&P Global Market Intelligence projects that 12-month inflation could fall below the Bank of England’s 2% target by mid-2024 because of “baseline effects from the normalization of energy and food prices”.

Badiani’s team also sees weakening demand to ease domestic price pressures as the UK “struggles to emerge from a consumer-led recession in the first half of 2023”.

However, they believe the MPC will raise the terminal rate to 4% in early 2023, before a “free-fall” of inflation in late 2023 allows policymakers to cut rates from early 2024 and finally restore the bank rate. By November, it had reached 2.5%.


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