The Fed has probably finished hiking, but the BoE has more to do
Allianz Global Investors
Global economic insights & corporate news by Allianz Global Investors.
Comments on BoE from Mike Riddell, Head of Macro Unconstrained at Allianz Global Investors.
Key takeaways:
- At the upcoming meeting on 11 May 2023, we expect the Bank of England (BoE) to hike rates by 25 basis points (bps) which, in our opinion, is not enough to curb inflation.
- We expect the market reaction at such a hike to be positive. We think the UK economy is not yet buckling under the weight of all the hikes to date and the BoE can’t point to many signs of a sharp deceleration in growth that would give them confidence that inflation will fall back to target over the next year or two.
- We believe the BoE needs to tighten policy further, and we’ll likely need more than another 25bps hike in this cycle.
We are approaching the end of one of the most aggressive global interest rate hiking cycles in history. The BoE was one of the first developed market central banks to hike back in November 2021, but we think that it did not do enough.
In the US, headline inflation has almost halved from the highs last summer, and the Federal Reserve’s preferred core inflation measure peaked over a year ago. But UK headline inflation is still stubbornly above 10%, and core inflation has been stuck at around 6% for a year now.
Cracks are spreading through the US labour market. But this is not the case in the UK, where wage growth over the last 3 months has averaged an annualised rate of 6.6%, higher even than UK core inflation.
We believe this poses a real problem for the BoE. If the BoE is correct and long-term annual productivity growth of the UK economy is now only around 1%, then we think that hitting a 2% inflation target would mean nominal wage growth in the UK needs to be less than half the rate it is now, otherwise inflation will continue to overshoot.
On the growth side, the UK economy is not yet buckling under the weight of all the hikes to date. Although the housing market is clearly now weakening, UK consumer and business confidence has bounced back this year, in line with what’s happened in much of continental Europe. Therefore, we believe the BoE can’t point to many signs of a sharp deceleration in growth that would give them confidence that inflation will fall back to target over the next year or two.
The BoE therefore needs to tighten policy further, and we’ll likely need more than another 25bps hike in this cycle.
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Insightful comment: It's interesting to think about how the actions of central banks can influence not only economies but also climate change. In the past decade, we've seen a growing recognition of the impact of climate change, and it's crucial for monetary policy to incorporate this into their decision-making processes. For example, hiking interest rates too quickly or too much could slow down the adoption of green technologies and renewable energy investments. It's essential to strike a balance between managing inflation and considering the long-term effects of actions on the environment. As we navigate the next few decades, it's clear that central banks need to be more proactive in considering the impacts of climate change in their monetary decisions.