Bank of England Now Seen Raising Rates Twice This Year

Image © Adobe Stock, Pound Sterling Live.

Bank of England rate expectations have flipped from two cuts to two hikes in just three weeks.

It's been a remarkable three-week journey for British interest rate expectations.

Before the start of the Iran war nearly three weeks ago, money markets saw two rate cuts, but fast forward to today, and there are two rate hikes in Britain's rate profile.

Interest rates, savings rates and the pound are all marked higher as a result.

The latest uplift in rate expectations followed the Bank of England's March decision that's been digested as being on the 'hawkish' end of the spectrum of outcomes.

At the start of the month, it was expected there would be a comfortable majority of Monetary Policy Committee members voting to lower Bank Rate by 25 basis points. Instead, today they voted a solid 9-0 to keep rates unchanged.

They hiked their inflation forecasts too: The MPC looks for CPI inflation close to 3.5% in March, almost 0.5 percentage points higher than expected in the February Report.

CPI inflation had previously been projected to fall to 2.1% in Q2, but is now expected to be around 3%.

Even if inflation gradually falls to 2.0% from Q2, the Bank won't be in a position to cut rates until at least the third quarter.

Money market pricing is more assertive: cuts are out of the picture altogether this year, and if anything, the Bank must raise rates to prevent damaging second-round inflationary effects from grabbing hold of the UK.

"What the MPC is more sensitive to is the risk of second-round effects being triggered, which would have a more persistent effect on inflation. In the event of there being evidence of such risks being crystallised, the MPC would likely see tighter monetary policy as an appropriate deterrent," says Nikesh Sawjani, Senior UK Economist at Lloyds Bank.

The Bank of England intimates it is inclined to look at the coming energy shock as being an inflationary blip. However, it knows inflation will snowball into other areas if households and businesses think inflation will only rise from here.

For instance, workers ask for pay rises to protect their living standards and businesses put up prices to meet obligations and maintain margins.

The Bank's communications show it still thinks it can lower rates later in the year, but the market is telling a different story: inflation is going to surprise us in the coming months and the Bank will have to respond.