Bank of England to hike interest rates for 12th time, as UK recession looms

Another week, another interest rate hike. That looks set to be the case Thursday as the Bank of England gears up for what the market expects to be the twelfth straight interest rate hike. 

Backing out probabilities from futures pricing, there is a near-100% opinion in markets that a 25 bps hike is incoming. This would take the rate from 4.25% to 4.5%, the latest jump in what has been the quickest hiking cycle in history.

The Bank of England feels its hand is forced. Inflation has roared globally over the last year, however in the UK, it is proving particularly nefarious. The country last month revealed inflation was still running in the double digits, among the highest in Western Europe. 

While inflation has peaked and begun to come down elsewhere in the continent, the UK is still running over five times their target 2% rate, with the trajectory yet to shift downward. 

Core inflation is refusing to come down

Of grave concern to the Bank of England will be the persistence of core inflation, too. This is the metric one gets when the volatile items of food, energy, alcohol and tobacco are stripped out. Traditionally, it is often the one that policymakers focus on, as the aforementioned items are more sensitive to external factors , with core inflation more ripe to be tamed by monetary policy. In the UK’s case, however, there has been no letup. 

The Bank of England faces the same predicament of central banks across the globe: hiking rates is necessary to curtail inflation, but hike too much and you risk tipping the economy into recession. 

In Britain, this tightrope is particularly challenging to tiptoe. The IMF forecasted earlier this year that the UK would be the only advanced economy to go into recession in 2023. 

In the US, markets are moving to the expectation that hikes are now in the past, while economic data is much stronger and inflation tamed to a much larger degree, compared to Britain. Even with the Bank of England’s expectation that inflation in the UK will come down from later this year, the targeted 2% rate appears a long way off – and the contrasting trajectory is clear to see when comparing both nations’ inflation rates. 

What next for the UK?

Despite the apparent gloominess of the situation, economic data has at least held up better than what was anticipated a few months ago. Falling gas prices have eased pressure on the UK, while the labour market has remained resilient thus far.

Nonetheless, the most recent GDP data in February was flat, compared to 0.1% anticipated, while the elephant in the room is that the effects of monetary policy are often lagged: the rate hikes have been extreme, and that will filter through before long. While the picture may appear brighter than what it did a few months ago, times are still very tough in Britain. 

There is also ongoing strike action across many major areas of the labour market, which may impact the next set of GDP numbers. And while the US and Europe hope that the end of rate hikes are here, the UK is not so sure. 

Following the imminent 25 bps hike Thursday, there could still be more to come down the line which, again, will suck liquidity from the system and put an already creaking economy under further pressure. 

With a stagnating economy struggling to grow beyond pre-COVID levels, strike action rampant across the labour market, inflation still in the double digits and another rate hike on the way, policymakers in the UK face an incredibly tough battle to navigate the nation through this without a punitive recession.