JPMorgan Sees BOE Rate Hike This Year If Supply Issues Persist

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A Bank of England rate hike looks likely this year if U.K. supply problems don’t ease and inflation pressures aren’t tempered by the end of government job support.

That’s according to Allan Monks, an economist at JPMorgan Chase & Co., who said in a note to clients that while the Monetary Policy Committee would prefer to delay a rate increase until 2022 so that it can avoid an impression of panic, “potentially longer-lasting negative shocks to labor supply from both the pandemic and Brexit” may force its hand earlier.

The BOE opened the door to an interest rate rise as soon as November in the minutes of its September meeting by saying that any future tightening should start with a rate hike, even if that “became appropriate” before its bond-buying program finishes around the end of the year. 

Given that clear data on the impact of the end of the furlough scheme on the unemployment rate won’t be available until at least December given its lagging and volatile nature, the BOE has left economists scratching their heads over what evidence the MPC will deem necessary to justify a hike. Monks said that news on wages, the speed of the labor market tightening and inflation expectations will have a big sway.

If the end of government wage subsidies on Sept. 30 does not alleviate pressures in the labor market, Monks said, “a 4Q21 tightening would look more likely” than JPMorgan’s base case of a 15 basis-point hike in the first quarter of 2022, followed by a 25 basis-point hike in the third quarter. 

As inflation risks mount, markets are now pricing three hikes next year, betting that policy makers will be more concerned about a surge in inflation than an uncertain economic recovery.

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