Bank of England Could Surprise and Hold Rates this Week says Economist

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The Bank of England could keep interest rates unchanged on Thursday, citing the war in Ukraine, in what would amount to a signifiant downside surprise for the British Pound.

"We think that there is a higher chance that policymakers will surprise markets by holding steady," says Kallum Pickering, Senior Economist, at Berenberg Bank.

The market is priced for a rate hike of 25 basis points, with a further 100 points of rises anticipated for the remainder of the year as implied by the OIS curve.

The hefty expectations come despite surging global commodity prices and investor uncertainty linked to the war in Ukraine, which economists say will invariably impact negatively on UK growth.

"We expect Putin’s war to badly hurt UK economic performance during Q2 and through the early part of Q3 before healthy consumer and business fundamentals reassert themselves and lift momentum through H2 2022," says Pickering.

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Pickering says the Bank of England would best serve the economy by opting to delay a rate hike in March and raise rates again later in the year once uncertainty has passed.

Berenberg now expects two more hikes in 2022 - May and August - and for the Bank to begin active bond sales as part of its quantitative tightening programme in November.

Not raising interest rates in March would amount to another anti-consensus move by the Bank which raised rates unexpectedly in December, having already wrong-footing investors and analysts alike in November when they kept rates unchanged.

By going against the flow in March the Bank would keep alive a tradition of unpredictability that has come to define the Andrew Bailey governorship.

"By the time of the Monetary Policy Committee (MPC) meeting in May, the BoE will have a much clearer view upon which to judge the correct course for policy. To raise rates before the balance of inflation risks becomes clearer would be to act in haste and risk a policy error," says Pickering.

Berenberg expects two hikes per year in 2022, 2023 and 2024 to take the bank rate to 2.0% by end-2024.