'Hawkish' Bailey Signals Double-header of 50bp Rate Hikes Incoming, But Cuts in 2023 says Berenberg

Above: File image of Bank of England Governor Andrew Bailey. Image courtesy of the Bank of England, reproduced under CC licensing conditions.

Bank of England Governor Andrew Bailey has turned 'hawkish' and will deliver two successive 50 basis point hikes, according to new analysis.

Kallum Pickering, Senior Economist at Berenberg, says in his most recent speech Bailey has effectively signalled a faster pace of interest rate hikes now lies ahead.

"A 50 basis point increase will be among the choices on the table when we next meet," Bailey told guests at the annual Mansion House dinner.

The speech confirmed the Bank of England's intention to act "forcefully" in the face of surging inflation, which is not expected to peak until the end of the year.

Pickering says Bailey's vote will effectively swing the rest of the Monetary Policy Committee (MPC) into a more aggressive approach to hikes.

In both the May and June meetings Jonathan Haskel, Catherine Mann and Michael Saunders all favoured a 50 bp hike, however the majority had sided with Governor Bailey and opted for just 25bp, which carried the day.

Berenberg has argued over recent months that a faster pace of hikes will ultimately depend on the crucial vote of Bailey himself.

"Following the signal from Bailey yesterday, therefore, we now think that 50bp steps are the most likely outcome at both the 4 August and 15 September meetings (up from 25bp each before)," says Pickering.

Bailey's Mansion House speech came the day before the ONS reported UK inflation read at 9.4% year-on-year in June, ahead of the market's expected 9.3% and up on May's 9.1%.

This after prices rose 0.8% in the month to June, ahead of the 0.7% expected by markets and the 0.7% rise in the month to May.

Inflation is well above the Bank of England's 2.0% target and resonates with fears expressed by Bailey in his speech that "we see the balance of risks to inflation as on the upside".

Economists say inflation will almost certainly break the 10% barrier towards the end of the year.

The National Institute of Economic and Social Research (NIESR) forecasts annual CPI inflation will peak close to 11% towards the end of 2022/beginning of 2023, because of the hike in the energy price cap, and remain above target through 2023.

"While Bailey did not provide any signal about September, with inflation likely still rising by then ahead of a possible peak in October when the household energy price cap increases again, we expect the BoE to keep up the 50bp pace for at least a second meeting," says Pickering.

But Berenberg thinks the Bank will soon be done with rate hikes and 2023 will bring with it interest rate cuts.

They look for the bank rate to peak at 2.5% in November and not in the second quarter of 2023, as previously expected.

They now forecast that the Bank will remain on hold in the first half of 2023 and continue to expect 50bp of cuts in the second half of 2023 and a further 50bp in the first half of 2024 to take the bank rate to 1.5% by end-2024.