Money managers warned that still-high U.K. inflation data — albeit now down to single digits — will keep the Bank of England on a tightening path, with an expectation of further interest-rate hikes starting in June.
The April consumer price index figure came in at 8.7% on Wednesday, falling from 10.1% in March. However, the consensus had been that April inflation would come in at 8.3%, while the BOE expected it to drop to 8.4%.
Higher-than-expected inflation "puts further pressure on the Bank of England to remain skewed to a monetary tightening stance," said Charles Hepworth, investment director at GAM Investments, in an emailed comment. He sees a 5% base rate for the U.K. as looking more likely following the inflation data release. The U.K. interest rate is currently 4.5%, with the next decision due June 22.
"The market has moved to push the Bank of England terminal rates to 5.35% by the end of this year, which would constitute roughly three more 25-basis-point hikes beginning next month in June," said Orla Garvey, senior portfolio manager for fixed income at Federated Hermes, in an emailed comment.
Modupe Adegbembo, G7 economist at AXA Investment Managers, said in an emailed comment that the firm had expected the BOE to pause interest-rate hikes at its June meeting, but that "today's data will make it a challenge for the BOE … to pause its hiking cycle." AXA IM said the risk of the bank increasing by 25 basis points in June "has risen considerably. Between now and 22 June, we will receive further labor market inflation data which will be key," Ms. Adegbembo said.
While managers said the worst may be behind the U.K. in terms of double-digit inflation, longer term "our fear is the very real risk of stagflation in the U.K. in which we see persistently high inflation alongside weaker growth and higher unemployment," said Mark Preskett, senior portfolio manager at Morningstar Investment Management Europe, in an emailed comment. "We are starting to see signs that the higher interest rate environment is impacting mortgage delinquencies and rent arrears. The Bank of England needs to tread carefully not to tip the U.K. economy into a deep and long-lasting recession in its efforts to control inflation."
