Following a series of significant upside surprises on UK inflation and wage growth, the market is now expecting a series of further interest rate hikes from the Bank of England. So Katharine Neiss, chief European economist of PGIM Fixed Income ahead of the BoE meeting.
The recent data stream is in stark contrast to what has been observed in the US and the euro area, where both headline and core inflation are declining. The United States is grappling with an overheated labor market, while the euro area is still feeling the effects of the energy shock affecting other non-energy goods and services.
The UK, however, feels both effects: a double blow to inflation. All of this suggests that the UK has a bigger inflation problem than its peers, hence the rush for further interest rate hikes the market now expects.
Barring further negative shocks, our baseline scenario is for the Bank of England to continue its prudent approach and raise rates by 25 percentage points at its next policy meeting. However, if the May CPI data turns out to be stronger than expected, a 50bp hike could be in sight.