Still-high U.K. inflation increases the chance of a 50-basis-point interest-rate hike by the Bank of England, although money managers still expect a 25-basis-point increase Thursday.
The Office for National Statistics released its latest consumer price index data Wednesday, showing annual inflation through May at 8.7%. The figure was unchanged from April data.
The BOE last month raised rates by 25 basis points to 4.5%, its 12th consecutive increase. While Pacific Investment Management Co. executives still expect a 25-basis-point hike Thursday, the data increase the chances of a surprise 50-basis-point increase.
At its meeting in May, the BOE kept its "conditional guidance unchanged, indicating that more tightening would be needed if there were to be evidence of more persistent inflationary pressures," said Peder Beck-Friis, senior vice president and economist at PIMCO, in an emailed comment. "Since then, inflation has surprised meaningfully to the upside in two consecutive releases."
Mr. Beck-Friis said the data "will add pressure on the BOE to continue tightening in coming meetings," and that the central bank "has likely more work to do."
Similarly, Goldman Sachs Asset Management executives have a 25-basis-point increase as their base case, but "the data opens the door to an increased pace of a 0.5% rate rise," said Gurpreet Gill, macro strategist, global fixed income, in an emailed comment.
"Core and services inflation, alongside food prices, continue to diverge from moderating trends observed in other advanced economies like the U.S., complicating the path towards the bank's target," Ms. Gill said. "We see upside risks to our terminal rate forecast of 5.25%. However, downside growth risks may exert disinflationary pressure later this year."
Andy Burgess, fixed-income investment specialist at Insight Investment, said in an emailed comment that there is "a small but not insignificant risk that (the BOE) may choose to hike by 50 (basis points) in an attempt to restore confidence to markets. In the medium term, more pain now may help to anchor runaway forecasts for the terminal level of rates, with markets growing increasingly uncomfortable that U.K. inflationary pressures are not subsiding as rapidly as elsewhere."
Should the bank not increase by 50 basis points, "we could see the bank indicate that there is more work to be done, with a more hawkish tone and potentially some indication in the vote that a larger move was hotly debated," Mr. Burgess added.