Annual inflation in the United Kingdom reached a 30-year high of 7% in March, as food and energy prices continued to rise, and The Bank of England is expected to raise interest rates for the fourth time in a row on Thursday, but economists are concerned that the country is entering increasingly turbulent waters. 

Meanwhile, consumer confidence has plummeted amid concerns about slowing economic growth in the aftermath of Russia’s unprovoked invasion of Ukraine. 

At its March meeting, the Bank raised interest rates for the third time in a row, raising the bank rate to 0.75 percent, and the market expects a 25 basis point increase to 1 percent when the Monetary Policy Committee meets on Thursday. 

Rather than following the US Federal Reserve with a 50 basis point hike, the Bank may opt for a more gradual approach to tightening. Given the nature of the inflationary pressure, Berenberg Senior Economist Kallum Pickering warned on Tuesday in a note titled “Bank Of England preview: A risky hike” that the Bank Of England’s widely anticipated hike is “not without risk.”

The MPC predicted in February that inflation would peak at 7.25 percent in April, but economists now expect it to exceed that figure and stay higher for longer as a result of Russia’s invasion of Ukraine and the subsequent spike in commodity prices. 

“Over a policy-relevant horizon of two years, the Putin shock will most likely depress demand growth, which may also affect inflation dynamics over time.” If we’re unlucky, the United Kingdom is already in the early stages of a recession,” Pickering predicted. 

“In the face of unusual uncertainty, policymakers – who should aim to minimize output losses over the business cycle – would be wise to maintain the policy as is for the time being until incoming data dictate the appropriate policy response.”

Even before the Ukraine war, the MPC was forecasting persistently high inflation and a dimming growth outlook, and ING Developed Markets Economist James Smith believes new forecasts released Thursday will show that the growth-inflation trade-off has only gotten worse since. “The net result is likely to be an inflation forecast that peaks around 9% in April and stays close to that level throughout 2022, as well as an economic outlook that includes at least one-quarter of negative growth this year,” he added. 

“The question for this week is whether rising demand risks will motivate other policymakers to side with Cunliffe – who will most likely continue to support a wait-and-see approach,” Berenberg’s Pickering said. Contact us for more information.

“According to OIS (overnight index swaps) markets, which predict that the Bank Of England will hike six more times in 2022 to bring the bank rate to 2.25 percent by year’s end, more dissents in favor of remaining on hold would be interpreted as dovish.” 

In February, the Bank began unwinding its balance sheet, passively reducing the record £875 billion in UK gilts held at the start of the year by not reinvesting maturing assets and actively selling its much smaller £20 billion in corporate bonds. 

According to the central bank’s guidance, active gilt sales could begin when the bank rate reaches 1%; however, given the increased risk of market volatility and tightening financial conditions, active gilt sales are unlikely to begin on Thursday. 

“If the Bank of England does begin active gilt sales, it is likely to begin very gradually – probably at a rate of no more than £1 billion per week – so that policymakers have time to assess the market impact and adjust the pace if necessary.”