22 March 2023 Monetary Policy & Inflation | UK

BoE to Hike 25bp After Inflation Surprise

By Ben Ford
3 min read

Summary

UK inflation came in higher than expected this morning, prompting markets to reprice hiking expectations at Thursday’s Bank of England meeting.
We now expect the BoE to hike 25bps, rather than our previous expectation of a pause.

A Surprise Print

UK February CPI (10.4% YoY; 1.1% MoM) shot above expectations (+9.9%; +1.1%) with food and non-alcoholic beverages (+18.0% YoY), and water and energy (+26.6% YoY) maintaining their damaging presence.

In response, there has been a big repricing of expectations for tomorrow’s Bank of England policy meeting. A full 25bp hike is now fully priced for tomorrow, versus ~55% probability at close of business yesterday. For the May MPC meeting, there is an ~80% probability of another 25bp hike, according to GBP OIS.

Digging Into the Detail

We had long been calling for a BoE slowdown, looking for a pause at this meeting. However, this rested on employment and inflation data providing softer prints. While there were some dovish takeaways on the employment front, namely wages, the breadth of inflation has widened once more as MoM prints (across headline, goods, services and core) returned above 1%. Inflation momentum proved the only positive.

Looking forward, and concentrating on services, similar seasonalities can be seen through March. However, a less supportive picture can be painted through Q2; April typically sees the strongest MoM print (it will not be out before the May meeting) while inflation momentum is at its seasonal lowest through February.

Our Call for Thursday

On the implications, we now expect the BoE to hike by 25bp tomorrow. Such an outturn should mean all major European central banks have hiked despite the recent turmoil – we expect Norges to hike by 25bp tomorrow, with a hawkish outturn likely, while the ECB have already delivered 50bp of their own and the SNB are expected to do the same.