The Bank of England is expected to boost interest rates to 4.75% as inflation continues to pester.

The Bank of England is expected to boost interest rates to 4.75% as inflation continues to pester

The Bank of England is anticipated to hike interest rates by 25 basis points to a 15-year high of 4.75% on 22 June as it battles unexpectedly persistent inflation that threatens to make it a global outlier.

Investors wagered this week that the BoE will raise interest rates to 6% this year, a level not seen in Britain since 2000 and much above what the Federal Reserve or the European Central Bank are projected to do.

On Tuesday, Bank of England Governor Andrew Bailey told a parliamentary committee that inflation was taking "a lot longer than expected" to fall and that the employment market was "very tight."

Bailey made the remarks just after official numbers revealed that basic pay increased by 7.2% year on year in the three months to April, the quickest rate on record, excluding times when data was affected by the COVID-19 epidemic.

While wages continue to fall when adjusted for inflation, these figures prompted investors to increase their bets on the Bank of England raising interest rates, pushing two-year government bond yields to their highest since 2008.

Three weeks ago, there was a similar dramatic shift as data showed consumer price inflation declined less than expected in April, keeping it at 8.7%, joint-highest among big advanced countries like Italy.

How long to go?

When determining how much additional rate tightening is required, the Bank of England examines three major obstacles.

First, the structure of the UK mortgage market has shifted since the previous tightening cycle in 2006-2007. Because fewer families have mortgages and more are on fixed rates, a crucial avenue for increased interest rates to affect the economy is now delayed.

While the latest rise in interest rates has caused havoc for homeowners, the Bank of England thinks that three-quarters of the tightening has yet to be felt.

Secondly, it is uncertain how much of Britain's inflation premium over other nations is attributable to a temporal lag, partially related to the timing of energy subsidies, rather than ongoing inflation pressures.

Nonetheless, the Bank of England is likely to have been concerned by core CPI climbing to 6.8% in April, the highest level since 1992. The May inflation report is coming on June 21.

Lastly, it is uncertain how much Brexit and any long-term effects of COVID-19 on the labour market have impacted Britain's productive capacity.

In the short run, market interest rate expectations have returned to where they were in November when the Bank of England signalled that they were unsustainable.

(Sources: investing.com, reuters.com)