Deutsche thinks BoE's UK rate call in May is "finely balanced"

(Alliance News) - Deutsche Bank expects the Bank of England to leave UK interest rates unchanged when it next meets in May, following today's 25 basis point increase to 4.25%.

The investment bank had expected further divisions to emerge within the Monetary Policy Committee, but noted today's decision showed the opposite: most members on the MPC, including the core internal committee, continued to see a strong case for hiking bank rate.

Deutsche said today's hike was a result of three factors: a loosening of fiscal policy, a still tight labour market, and a stronger domestic and global economy, raising the prospect of more persistent price pressures – something the MPC explicitly noted in its decision.

Financial stability risks not an issue...yet, the investment bank noted. But given elevated uncertainty, there is now added focus on credit conditions, something the MPC will be monitoring closely going forward.

Deutsche said with the MPC remaining data dependent, the February inflation surprise leaves the door open to another hike.

But the case for another hike is still very finely balanced, it said.

Services inflation, average weekly earnings, and credit conditions will all be key.

"While we see some upside to growth and pay, we see some downside to services CPI and credit conditions, leaving the May meeting outcome a difficult decision to call."

On balance, Deutsche sees more downside risks than upside.

As such, it stuck to its call for bank rate staying put at 4.25% with risks tilted to one further hike in May.

But economists at Rabobank think that bank rate could rise as high as 4.75% with the next 25bp hike coming in May, although it stressed this requires that global financial stability risks remain contained.

It noted the shift to a meeting-by-meeting approach is not as dovish as some expected.

Analysts at the bank pointed out this is a time of maximal confusion, and new narratives develop and travel through markets at an increasingly fast pace.

In such conditions, projecting a lot of confidence in an economic or rates outlook doesn’t make much sense.

For now, it expects the MPC to go on making decisions that it believes are needed to return inflation back towards target.

"We see the balance remaining tilted towards inflation risk rather

than financial stability risk, after having painfully underestimated inflation in 2021-2022," analyst said.

"We hold on to our long-held view that bank rate could rise as high as 4.75%."

By Jeremy Cutler, Alliance News reporter

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