Tomorrow, the Bank of England will announce its policy decision. It’s expected to keep rates unchanged, but there’s plenty of reason to suspect BoE chief Mervyn King may surprise.
UK inflation has surged in the past few months, and stood at 3.7% in December. Despite the rise in inflation, the economy remains weak, and with more austerity measures to come, it could get even worse.
Some even expect a rate hike tomorrow, and it seems like the BoE’s monetary policy committee is trending in that direction.
There has definitely been a shift towards a more hawkish stance at the MPC, most notably from Martin Weale who followed Andrew Sentance in January and voted for a rate hike. We can also deduce from the minutes of the last MPC meeting that the barrier to raising rates has also been lowered in recent weeks.
While it definitely has a chance of happening (18% according to currency news today), it still seems pretty unlikely. Part of the reason is that you can’t tame imported food and energy prices with a rate hike and those are a big part of the inflation surge.
So the big surprise tomorrow morning could be a couple of monetary policy committee members switching sides to support a rate hike. Watch out for that.