The Bank of England’s base rate was pegged at 1.50% until January 2023

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Image source: Bank of England. Credit Laura Bell.

A leading economist says the Bank of England is underestimating the extent to which wages will rise in the future and that the base rate will be close to 1.50% by the start of 2023.

Such results would reinforce the market’s expectation that the bank will make up to five more hikes in the coming months, which in turn is proving to be a source of sustained support for the pound.

“More rate hikes are coming,” says Mikael Olai Milhøj, chief analyst at Danske Bank, “we continue to believe that the risk is biased towards more rate hikes.”

The call follows the bank’s decision to raise interest rates by 25 basis points on February 3 in response to rising inflation in the UK.

Danske Bank says wages in the UK now have the potential to surprise to the upside and this could keep inflation high for longer than the bank expected.

Wages are one of the main sources of domestically generated inflation and UK weekly wages have remained high by historical standards, albeit coming back from post-pandemic highs.

Weekly earnings, including bonuses, were 4.2% in November, according to ONS; in October, the gain was 4.9%.

“We believe that the BoE’s wage growth forecast is too low,” says Milhøj.


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Above: “Median wage fell sharply in April 2020 but has returned to previous trend” – ONS.

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The job market is likely to remain resilient as job vacancies rose to a new record 1,247,000 in October-December 2021, up 462,000 from pre-coronavirus levels in January-March 2020, with most Industries have record numbers of vacancies.

Danske Bank now expects the Bank of England to make four more rate hikes of 25 basis points this year (March, May, August and November), up from two additional hikes earlier.

This means that the bank rate will start at 1.50% in 2022.

Your new call remains slightly less aggressive than market prices, which price in five rate hikes.

But “we continue to believe that the risk is biased toward further rate hikes (and also a 50 basis point probability of a rate hike). The BoE is now likely to announce some details on the ‘active QT’ in connection with the May meeting,” says Milhøj.


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Above: “Job vacancies rose to a record 1,247,000 from October to December 2021” – ONS.


The Bank of England sparked a sharp rally in UK bond yields and the value of the pound was one vote away from a 50 basis point hike in February following the Monetary Policy Committee (MPC) revelation, boosting expectations for future rate hikes.

But sterling and rate hike expectations eased again after Bank of England Governor Andrew Bailey warned in a news conference it would be a mistake to assume rates are on an inevitable long march higher.

The MPC also reiterated that “some modest streamlining” was needed in its guidance.

The bank is therefore keen to keep expectations in check lest they drive up the cost of funding in the economy too quickly.

Crucial to the outlook is to what extent they can keep the current cycle of interest rate hikes short-lived, or whether they need to rise for longer.

The economists at Credit Suisse see a relatively long cycle of rate hikes, which could push the key interest rate up to 2.0%.

Such a prediction would confirm existing ‘hawkish’ market expectations and potentially underpin the pound going forward.

“In our view, despite the fall in inflation in the second half of 2022, further tightening of monetary policy is warranted,” said Sonali Punhani, Chief Economist UK at Credit Suisse. “We believe that the fall in inflation is likely to slow, but not stop, the walking cycle.”

This is because Credit Suisse shares Danske Bank’s determination that the UK labor market is tight and will therefore not allow the bank to exit; They expect the labor market to tighten further due to strong labor demand and tight labor supply.

“Strong wage pressures should keep underlying inflationary pressures intact even as pressures from energy and commodity prices ease,” says Punhani. “There is a risk that wage growth will expand as inflation increases wage demands amid a tight labor market.”

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