- MPC set to raise rates by 25 bps to 4.75% 

- Vote unlikely to be unanimous

- Communique` expected to signal further hikes

- CPI data forecast to stay above target

- Announcement scheduled for 11.00 GMT

By Harry Daniels     

LiveSquawk News     

@HarryDaniels71     

UPDATED: 21 June 2023 | 12:00 GMT     

LONDON – At the start of the year, experts envisaged the current Bank of England hiking cycle would end by the summer. Incredibly, markets had even priced in multiple rate cuts before year end. That view appears to have dissipated, as policymakers push monetary policy further into restrictive territory.

The Monetary Policy Committee is expected to lift the main lending rate by 25 basis points to 4.75% at the culmination of its meeting on Wednesday. The majority of economists polled predict a 7-2 vote in favour of a quarter-point hike, although some foresee a more aggressive voting pattern.

“This week, much hinges on UK CPI data for May,” Barclays’ Ben McLannahan said. “An upside surprise relative to our projections could lead to a more hawkish MPC vote split than our base case (1-7-1 for +50bp/+25bp/+0bp), but we think the bar for the BoE to deliver 50bp is high.”

BofA analysts posited that given strong wage and price momentum there is a risk that the more hawkish members of the committee vote for a 50bp hike, and a greater risk than recent meetings that one of the doves votes to hike 25 basis points. “We assume a 2-6-1 vote (hold, 25bp, 50bp), with wide risks.”

In a fairly common theme, experts are of the opinion that the nation is in the midst of an entrenched inflation problem.

Noting the key data prints ahead of the meeting, such as household inflation expectations and CPI on Wednesday, the bank added that in its view the figures so far justified more than a 25bp hike.

For households, the rising cost of everything is not being helped by the pace of interest rates rises. This year, nearly 800,000 homeowners will face the expiration of their fixed mortgage deals with a further 2.4 million due to fall off in 2024 with many likely to see loan repayments accelerate.

But, argued EY ITEM Club’s Martin Beck, not all recent inflation developments have been adverse. “Producer price inflation has continued to fall, as have households’ and businesses’ inflation expectations, while growth in the money supply has slowed to a fraction of 2021’s peak,” he said. “While wholesale energy prices have been volatile, the general direction has remained downward.”

A report published this week said British food manufacturers reported a first fall in production costs since 2016 in May. "It will still take some time before we see the benefit in terms of shelf prices," said Annabel Finlay, a managing director at Lloyds Bank. "This is, in part, due to the long-term nature of contracts between the manufacturers and retailers, as well as the broader segments of the production chain."

Beck added that May consumer price data aside, there's nothing inevitable about the current bout of strong price pressures proving sticky. “Recent surveys from the BoE and Citi/YouGov show inflation expectations among the public continuing to decline.”

Barclays’ McLannahan, “We now forecast three 25bp hikes in H2, rather than one, and Bank Rate at 5.5% by November.”

Money markets are currently pricing a 30% chance of a 50 basis point move this week, rather than 25 bps but BofA judge this as unlikely. “The BoE has demonstrated over the past 20 months a preference for gradual moves.

“We expect the BoE to reflect the hawkish news by signalling likely upgrades to implied terminal rate in Aug forecasts.”