‘Door is open’ to interest rate hike as inflation fears return
An interest rate hike by the Bank of England this year is back on the cards as fears of continued oil and gas trade disruption across the Strait of Hormuz could push inflation higher, according to City economists.
A spike in oil prices to levels seen during the Iran war has dampened the mood across trading floors, leading to fears that the Bank of England could consider an interest rate hike.
HSBC economist Elizabeth Martins warned that the Bank of England would be a “little more cautious” around monetary policy due to the return of the conflict in the Middle East.
Martins suggested the case for a hold in interest rates at 3.75 per cent depended on the opening up of shipping traffic across the Strait, which is critical for a fifth of the world’s oil and gas supplies, though the prospects of normalisation in international trade was “more elusive”.
While interest rates are widely expected to be held at the next meeting, the top City bank expects both chief economist Huw Pill and external member Megan Greene to back a 25 basis point hike again.
Catherine Mann, who raised the alarm on sensitive inflation expectations among households and businesses, could also join the Monetary Policy Committee hawks in backing an interest rate hike, City analysts have said.
Interest rate hike possible due to ‘hawkish bias’
Official data on Wednesday showed inflation dropping in June to 2.6 per cent, having been at 2.8 per cent in the month before.
Economists have predicted that a reset in the energy price cap from July will push tip consumer price index (CPI) inflation over three per cent.
ING’s James Smith said the Bank of England would be more likely to hike interest rates if CPI inflation crept up to four per cent, which would be double its target rate.
“We’re still some way below getting there, even with the latest rise in oil and particularly natural gas prices,” Smith said, adding that he expected inflation to peak at 3.5 per cent at the end of the year.
UBS economist Anna Titareva said the “hawkish bias” on the MPC and the risk of the Iran war restarting left the “door open to further rate hikes”.
She added that the risk of higher inflation pushing up wage growth, and vice-versa, could be “managed” given the poor state of the jobs market and lack of bargaining power that workers have on demanding pay rises.
“Even in a scenario in which the MPC were to hike rates, the weaker starting point for the economy would, in our view, imply a relatively rapid reversal via rate cuts thereafter,” Titareva said.
“So while we do not rule out Bank of England rate hikes, we continue to see them as a risk scenario rather than the base case.”