DWS: Comments on the BoE rate hike

DWS: Comments on the BoE rate hike

May 11, 2023

Interest Rates Monetary policy UK
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Katrin Löhken, UK Economist at DWS, comments on the Bank of England's rate hike.

Today's 25 basis point interest rate hike by the Bank of England (BoE) to a Bank Rate level of now 4.50 percent came as little surprise. The unexpectedly strong inflation momentum and the lingering threat of a wage-price spiral have given the central bank no room for pause.

At the same time, the central bank's statement does not yet sound like today's rate hike marks the peak. Admittedly, previous hikes of a hefty 440 basis points at a very rapid pace will leave trace on the real economy. The real estate market has already suffered the most due to rising mortgage rates. The labor market and bank lending are also likely to weaken in the coming quarters. The transmission process of previous rate hikes is still ongoing - something the BoE also points out.

But risks of inflation turning out to be permanently too high still seem immense. Thus, the BoE cannot yet adopt a position of tense wait-and-see. It is rightly sticking to its forward guidance that it will become even more restrictive if inflation dynamics are more persistent than expected. Although not all monetary stimulus has yet reached the real economy, this argues for at least one more rate hike. The costs of ending the rate hike cycle too early are likely to be higher than the costs of another hike. Data dependency remains high.

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