The UK central bank is unlikely to raise rates at its next Monetary Policy Committee meeting, according to Aegon Asset Management fixed income manager James Lynch, despite broad consensus of another 25 basis point increase. 
Last month, the Bank of England raised interest rates to 4%, the 10th increase since it started the hiking cycle in December 2021, while as recently as mid February experts were calling for more rises to stem inflation, which remained stubbornly high at 10.1%.
Although the market appears to have priced in another hike this week, the economic factors that influence such decisions are precarious and could result in a shock result, said Lynch.
He said the decision was “always going to be a contentious one” but that “hawkish” forward guidance from the previous MPC meeting should give investors an idea of what to expect when it meets on Thursday.
“The data, specifically on private sector wages and services inflation (we get one more print on 22 March), has overall missed to the downside – this softening in data could have been enough to halt the rate rises,” he said.
This is a contrast to previous expectations, when slightly better economic growth forecasts meant the Bank of England was likely to follow its counterparts in the US and eurozone by raising rates.
After the last meeting, the market had been pricing in another 90bps of additional hikes this year, said Lynch, but this has changed in the wake of the Silicon Valley Bank (SVB) crisis. While the issue has seemingly been contained, some argue it was partly a victim of raising rates.
“One argument that has been taking place in central bank circles is over the sensitivity of the economies to higher rates and the ‘long and variable lags’ – for the past week at least, the pendulum has swung in favour of those who have a more cautious approach to monetary policy,” said Lynch.
“For this reason, we think the Bank will not raise interest rates this week. Risk management would suggest to wait and see on how the economy adjusts to the new level of interest rates, and they always have the data to fall back on as the main rationale. We may well have seen the last increase in interest rates in this cycle.”
Brad Tank, chief investment officer of fixed income at Neuberger Berman, agreed with Lynch, arguing that the current banking issues are a direct result of central bank policy, not something separate.
“The collapse of SVB was a sharp reminder that we can’t raise rates and drain liquidity this fast, and invert the yield curve this profoundly, and expect to come away unscathed,” he said.
As such, he argued that both the Federal Reserve and European Central Bank may pause rates.
“It’s worth remembering that it’s not a policy objective for any central bank to hit some previously signalled rate target, but to tighten financial conditions sufficiently to slow growth, job creation and, ultimately, inflation. Last week was a major step function in that tightening, which will contribute greatly to achieving those objectives,” he said.
Indeed, he noted that in the US markets are pricing in Fed fund rates to fall once again in 2023 as the central bank is further down the road in terms of its rate rises and has the flexibility to pause.
“We don’t think this hiking cycle is definitely over – policymakers will want to see confirmation in the inflation data over the coming months – but after this week, we do think they’ll be on indefinite pause,” he said.