With “sticky” inflation sitting at five times the Bank of England's target, it's a foregone conclusion that the Bank's rate-setting Monetary Policy Committee will raise the cost of borrowing once again on Thursday.
Economists are expecting the Bank of England to increase interest rates by 0.25 per cent to 4.5 per cent, for the 12th successive time.
The Bank of England's battle with inflation has been going on since December 2021, since when it has raised interest rates by 4.15 per cent.
The MPC does run the risk that its rate-hiking strategy in this cycle could be too harsh and inflation actually falls below the 2 per cent target in the coming years.
Balancing act
It's a tricky balancing act, especially given that monetary policy is often described as a sledgehammer used to crack a nut and that the 11 interest rate rises so far have yet to all feed through, given their lagging nature — it can take 18 to 24 months for the full effect of an interest rate rise to be felt in the wider economy.
Inflation in the UK is stubbornly high at 10.1 per cent, while the Bank England's target is 2 per cent.
The labour market remains tight as well — official figures showed earnings grew by 5.9 per cent in March and a shortage of skilled workers still keeping the number of vacancies high.
“Ahead of the May meeting, the Monetary Policy Committee can justifiably argue that the criteria for tightening monetary policy further, that it set out in the March policy statement, have been met: the labour market is still tight and wage growth and services inflation remain stubbornly high,” said chief UK economist at Oxford Economics, Andrew Goodwin.
Monetary medicine
The UK's inflation situation is in stark contrast to that in the US and the EU, where price growth pressures have started to ease, according to Laith Khalaf, head of investment analysis at AJ Bell.
“Markets are then expecting one further rate hike, possibly two, to be pushed through,” he said.
“The UK's headline inflation rate is running around twice that in the US, so it's easy to see why we might have to swallow another few doses of monetary medicine.”
By some calculations, the markets have priced in UK rates to peak at 5 per cent by September, ahead of what could be a long pause before they come down again.
Some, like HSBC strategist Daniela Russell, feel the market is being a little overzealous on interest rate predictions.
“While we acknowledge the risk of more tightening in the near term, we ultimately do not think the BOE will keep monetary policy as restrictive as markets are currently pricing,” she said.
Many economists still think that if the Bank of England raise rates on Thursday, it'll be the last time they do so in the current cycle, and that by this time next year, the MPC will be starting to consider to reduce rates.
Meanwhile, inflation in the United States has been falling for nearly a year now and while it slowed its downward march in April, at 5 per cent, it still sits as less than half of the UK rate.
The US Federal Reserve raised interest rates by 0.25 per cent last week, but strongly hinted that it might be the last hike in the current cycle.
Meanwhile, the European Central Bank also increased its interest rates by 0.25 per cent last Thursday, but added that it was likely that there would be more to come.
