Commenting on today’s 0.5% interest rate rise from the Bank of England, Chris Arcari, Head of Capital Markets, Hymans Robertson says:

“UK interest-rate expectations have fallen from the levels touched in the wake of September’s ‘mini-budget’ and reflect a little more tightening by the Monetary Policy Committee (MPC). We expect the MPC to pause soon, but even though the UK faces the worst 2023 growth outlook among the major advanced economies, the committee is likely to be cautious about easing policy while the labour market remains tight.

“UK inflation likely peaked in October, at 11.1%, but is forecast to fall only gradually, averaging 7.3% year-on-year in 2023 and still remaining above 4% year-on-year at the end of 2023. April’s rise in the energy price guarantee, tight labour markets, and strong wage growth, are likely to contribute to stickiness in prices. However, base effects, falling commodity prices and weak economic activity should reduce price pressures. Given inflation is still expected to be above 4% y-o-y by end of 2023, the MPC are unlikely to cut rates this year, unless the recession proves much deeper than forecast.

“We expect service inflation and private sector wages, which grew 7.2% year-on-year on average in the 3-months to November, to remain in focus and, as a result, think the market is correctly pricing a 0.5% p.a. hike on Thursday. Whether the bank will follow up with another 0.5% p.a. hike in March remains to be seen, but we think the BoE are close to the end of their hiking cycle.”