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UK-based lender Barclays have raised their forecast profile for the Bank of England's key interest rate while warning a 50bp hike in August is now likely.
The forecasts confirm UK savings and mortgage rates are likely to maintain an upward trajectory while also suggesting UK monetary policy can stay supportive of the Pound.
"The MPC introduced new guidance, paving the way for a 50bp hike if inflation pressures build beyond its expectations," says Fabrice Montagné, UK Economist at Barclays in London.
Barclays say a 25bp hike in August remains their baseline, but warn May and June inflation readings may result in a 50bp rise, as now expected by the market.
The Bank made clear in its statement it is now likely to be more reactive to incoming data than has been the case in the past.
Specifically, the MPC introduced new guidance at the June meeting that Barclays economists say is more flexible and possibly more hawkish:
"The scale, pace and timing of any further increases in Bank Rate will reflect the Committee’s assessment of the economic outlook and inflationary pressures. The Committee would be particularly alert to indications of more persistent inflationary pressures, and would if necessary act forcefully in response," read the Bank's statement.
"We see "forcefully" as a codeword for a 50bp hike and believe the new guidance is a significant pivot away from the previous one," says Montagné.
Above: "Markets are now pricing 75bp higher rates at their peak and a steeper pace of tightening than at the time of the May meeting" - Barclays. Source: Bloomberg, Barclays Research.
Furthermore, the new guidance now explicitly links the "scale, pace and timing" of further rate increases to indicators of underlying inflation, such as services and core services price index.
Barclays warn this change in guidance allows the Bank to adjust its tightening path to incoming data "on the fly".
With this data-lead approach now in place, investors will be asking what data will matter going forward.
Montagné suggests the data to watch going forward now appears to be core service inflation, which has been on an upward trend since early 2021.
The Bank appeared concerned that UK core inflation was now coming in hotter than equivalents in the Eurozone and the U.S.
UK core services inflation has shot higher this year, jumping up from 3.2%y/y in December 2021 to 4.9%y/y in April 2022.
"We believe that the new guidance now fully reflects the view that services, and in particular core services, are a relevant proxy of inflation persistence and possible second-round effects and, accordingly, a relevant indicator for the conduct of monetary policy," says Montagné.
Barclays adjust their Bank of England expectations to reflect a more hawkish and more flexible MPC stance.
They previously expected the Bank to stop hiking when Bank Rate reaches 1.5% in August but they now expect the Bank to hike once more in September when it reaches 1.75%.
"With its new guidance, the MPC seems to embrace a more activist stance, offering greater flexibility," says Montagné.