The Monetary Policy Committee (MPC) is expected to raise the interest rate by 0.25% to 4.50% this week, following a substantial 0.9% overshoot in the Consumer Price Index (CPI) inflation forecast.
Economists at Pantheon Macroeconomics said the decision, which will increase rates to the highest level seen since 2008, seems inevitable after March’s CPI figures were notably higher than expected.
“The MPC’s inaction in steering markets away from a high probability of a 0.25% hike suggests their tacit agreement with the direction,” said Samuel Tombs, chief U.K. economist. Together with senior U.K. economist Gabriella Dickens, Tombs predicts that seven out of nine MPC members will vote for the 0.25% hike, with Swati Dhingra and Silvana Tenreyro, who is leaving the Committee after the next month’s meeting, voting against it.
Tombs and Dickens noted that “The MPC is expected to revise up its GDP forecast due to falling wholesale energy prices, continued labour hoarding by businesses, and a loosening of the fiscal plans in the Budget. However, the Committee is expected to remain more pessimistic about GDP growth than most.”
They further explained that the MPC’s revised GDP forecast will be based on the market’s anticipated path for the Bank Rate, which has shifted upwards by 0.30% since early February. As a result, year-on-year forecasts for GDP are expected to increase to 0.2% in 2023, 0.5% in 2024, and 1.3% in 2025.
Tombs and Dickens also suggest that the MPC will likely forecast a gradual emergence of economic slack, equivalent to about 0.5% of GDP, if it hikes the Bank Rate as far as markets anticipate. “This will likely result in an eventual CPI inflation settling at about 1.8%, slightly below the 2% target, suggesting that the MPC might not need to raise the Bank Rate further.”
While this week’s anticipated rate hike seems a done deal, the economists said that “the MPC is expected to avoid giving clear verbal assurances about future rate decisions.”
