PIMCO: UK inflation print increases chances of bigger rate hike

PIMCO: UK inflation print increases chances of bigger rate hike

June 22, 2023

Monetary policy UK
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By Peder Beck-Friis, Economist at PIMCO

At the last meeting, the Band of England (BoE) hiked by +25bps to 4.5% and kept it conditional guidance unchanged, indicating that more tightening would be needed if there were to be evidence of more persistent inflationary pressures. Since then, inflation has surprised meaningfully to the upside in two consecutive releases.

There are reasons to think some of the recent inflation surprises have been driven by one-offs, such as the start of the new taxation year in April leading to a sharp increase in prices of products linked to RPI; and the May surprise being in part driven by the timing of Easter. There may also be some impact on air fares during the Coronation period and additional bank holiday. That said, core inflation is increasing, not decreasing.

This will add pressure on the BoE to continue tightening in coming meetings. With core inflation and wage growth both close to ~7% (YoY), and the policy rate closer to 5%, the BoE has likely more work to do. We still expect a +25bp hike, but yesterday’s release certainly increases the chances the BoE goes by +50bps.

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