"End of the road" for BoE rate hikes, UBS predicts

(Alliance News) - The Bank of England could be set to pause its hiking cycle at May's meeting, according to UBS, as inflation is set to fall sharply and cracks are appearing in the banking sector.

The BoE on Thursday raised UK interest rates by 25 basis points to 4.25%, as widely expected, and indicated that further tightening in monetary policy may be required.

However, many interpreted the bank's communications to be dovish in nature, and some even foresee a pause in rate hikes in two month's time.

UBS economist Dean Turner is among them.

"Despite the surprise jump in the pace of price rises in the February report...the BoE reiterated the view (one we share) that it is 'likely to fall sharply over the rest of the year'," Turner explained.

On Wednesday, figures from the Office for National Statistics showed a shock increase to UK inflation.

The consumer price index rose by 10.4% in February from a year before, accelerating from a 10.1% annual rise in January. Market consensus had expected UK inflation to cool to 9.8% in February, according to FXStreet.

However, inflation figures are likely to see a sharp drop from March onwards. This is as the inflationary impacts of the outbreak of war in Ukraine fall out the annual comparison.

The BoE said it expects the UK's inflation rate in the second quarter of the year will be cooler than the 8.5% the central bank forecast in its February monetary policy report.

"Moreover, policymakers highlighted that services inflation is in line with their expectations," UBS' Turner continued.

The bank said wage growth was likely to fall "somewhat more quickly" than its February predictions.

However, according to S&P Global survey data on Friday, UK companies are widely citing "strong wage pressures" and "ongoing wage inflation" this month.

The BoE on Thursday indicated it was poised to raise interest rates again if inflationary pressures persist.

"Even if one more hike is delivered, it does not change the bigger picture that this hiking cycle is nearing the end of the road," Turner said.

The focus will then move to interest cuts, he noted, which UBS expects to begin in the final quarter of this year, or early next year.

Another factor that supports UBS's predication is the recent turbulence in the global financial sector, following the near-collapse of Credit Suisse, and the failure of Silicon Valley Bank, among others.

"Similar to other central banks, the BoE is grappling with the need to push back against high inflation, as well as rising uncertainty about the outlook for the economy in light of the recent banking sector volatility," Turner noted.

The BoE said it judged UK banks to be "resilient" and "well placed to continue supporting the economy in a wide range of economic scenarios, including in a period of higher interest rates".

It added it would "monitor closely" any effect market tensions might have on the credit conditions faced by households and businesses.

"Bank wholesale funding costs have increased in the UK, as is the case in other economies. We cannot know for sure what the medium- and long-term consequences for lending to households and businesses will be, but at this stage it seems fair to assume that higher costs will result in less credit flowing to the economy," Turner said.

This will likely curb some of the positive momentum seen in the UK and further afield, he added.

By Elizabeth Winter, Alliance News senior markets reporter

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