Will the Bank of England hint at a 2022 interest rate hike?
The Bank of England will be announcing its policy decision on Thursday, and while no new projections or Inflation Report will be released, investors will be watching closely, particularly following last weeks hawkish surprise from the FOMC. The Fed indicated a shift in stance towards rising US inflation last Wednesday, with its revised dot plot suggesting that the bank could raise interest rates twice before the end of 2023 - a more aggressive pace than it had outlined in March. Communications from the Bank of England have arguably been even more hawkish than the Feds in recent weeks, particularly from outgoing chief economist Andy Haldane. Even one of the more dovish members of the committee, Gertjan Vlieghe, stated that he thought interest rates could rise next year if the recovery continued at its current pace. It will be interesting to see where the BoE stands on the pending global interest rate hike cycle. One key question for the bank will, of course, be the recent increase in UK inflation. Prices are rising at a rather rapid pace as the government gradually unwinds lockdown measures. The headline rate of consumer price growth rose above the BoEs target in May (2.1% year-on-year), with even the typically less volatile core measure of inflation jumping to 2% annually, well above the 1.5% consensus and its highest level since August 2018. Figure 1: UK inflation rate (2017 - 2021)  Source: Refinitiv Datastream Date: 22/06/2021  In May, the BoE communicated that it expects headline inflation to rise to 2.5% this year, before moderating in 2022. It will be interesting to see whether this view still holds, or if the MPC has seen enough evidence to suggest that the increase in prices may be more entrenched than first anticipated. We doubt that this is the case. We will, however, be looking closely for any suggestion from the BoE that the aggressive spread of the Delta variant and subsequently delayed reopening in Britain could materially affect the UKs economic recovery - again we suspect that it wont. With the next set of macroeconomic projections not due until August, we think that the MPC will probably try not to rock the boat too much on Thursday. We dont expect any additional policy tweaks to the QE program just yet, particularly given the MPC announced it would be reducing the pace of its gilts purchases from 4.4bn a week to 3.4bn as recently as the last meeting in May. The real topic of discussion will be the timing for future rate hikes. So far, policymakers have drawn the line at giving any concrete signals as to when this may occur and we expect that to be the case again this time around. A surprising hint that higher rates may be forthcoming as soon as 2022 would, however, likely jolt the market and provide good support for sterling. Yet, with the market already pricing in the first hike as soon as August 2022, we think that such a move would likely be of a relatively contained nature.