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Expect two UK rate hikes in 2022: economists discuss BoE policy

With concerns about the rate of inflation on most investors minds, two economists share their views on what we might see from the Bank of England in the months to come.

Katharine Neiss, chief European economist at PGIM Fixed Income

Well ahead of both the US Federal Reserve and the European Central Bank, the Bank of England’s Monetary Policy Committee (MPC) has already signalled it is on track to complete its current asset purchase programme by the end of this year. This is supported by the outlook for UK inflation and the economy, both of which have rebounded strongly following a successful mass vaccination campaign.

On the flip side, despite well-publicised labour shortages in particular sectors, large numbers of UK workers remain on furlough. And although the UK is advanced in terms of vaccination coverage, the impact of the Delta variant on the rest of the world is expected to weigh on demand for UK exports. These factors suggest the MPC will stay the course and leave policy on hold at its next meeting.

There is added uncertainty of course, with two new MPC members joining this month’s deliberations. However, with policy set on a predetermined course against a backdrop of economic uncertainty, we would expect them to be largely in listening mode at their maiden meeting.

Valentin Bissat, senior economist at Mirabaud Group

While market participants expect the first rate hike to take place in Q3 2022, we think an early rate hike in the second quarter is increasingly likely. Some MPC members have been suggesting in recent speeches the minimum conditions for tighter monetary policy have been met. The MPC is now evenly split between hawks and doves, according to Governor Andrew Bailey, but the rise in August inflation has tilted the risk in favour of an earlier hike, in our view. Besides, the new chief economist could side with the hawkish members of the MPC.

The labour market keeps improving, with solid wage growth and total employment now back to pre-pandemic levels. We expect two rate hikes in 2022, of 15bps and then 25bps, with the first hike helping the MPC to deliver on its mandate and anchor inflation expectations. The path of normalisation will be very gradual thereafter.

Downside risks remain, however. Covid-19 could weigh on growth, as well as other uncertainties linked to Brexit and supply chain disruptions. The MPC will keep policy unchanged during its policy meeting this week, but it will be interesting to see if the emphasis will be put on inflation rising, or growth slowing.

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