Bank of England Likely to Maintain Interest Rate as Bank of Canada’s Inflation Stance Faces Dispute

The Bank of England (BoE), led by Governor Andrew Bailey, is anticipated to keep its interest rate at 5.25% in the upcoming meeting, even with the current inflation rate at 6.7%, significantly above the target of 2%. Confidence in this decision stems from the belief that previous rate hikes have successfully moderated price increases. Chief economist Huw Pill expects a decline in inflation, linking this to rising unemployment figures and slowing wage growth, although the reliability of these unemployment figures is being scrutinized.

Despite ongoing strong wage growth and elevated near-term inflation expectations, three members of the Monetary Policy Committee (MPC) are expected to support a 25 basis point increase, according to economist Sanjay Raja from Deutsche Bank. The MPC’s last meeting in September resulted in a tightly contested decision to maintain the current rates. Sandra Horsfield of Investec predicts the BoE will reinforce its approach of keeping rates high for an extended period to combat inflation, while remaining open to further hikes if necessary.

The BoE’s decision will follow that of the US Federal Reserve, which is also likely to keep rates steady. This comes after the European Central Bank recently ended a series of ten consecutive rate hikes, highlighting a shift in the strategies of central banks regarding inflation management.

In Canada, Capital Economics disputes the central bank’s view on the need for interest rate increases to control inflation. The Canadian central bank has maintained its key policy rate at five percent and has indicated potential future hikes due to rising inflationary risks, suggesting inflation might stay above its two percent target until 2025.

Capital Economics argues that the central bank’s own forecasts in its Monetary Policy Report contradict its position. The firm asserts that the bank is overestimating the influence of oil prices on inflation while forecasting weak economic growth. They predict inflation will drop to 3.1% this quarter and further decrease to an average of 2.5% next year. This difference in projections may arise from varying assessments of home price trends in the housing market, a crucial factor in calculating inflation.

Additionally, Capital Economics critiques the bank’s inflation forecast for presuming that businesses will continue to raise prices amid high inflation expectations, which seems inconsistent with the bank’s downgraded GDP growth forecasts. As consumer spending slows, companies might modify their pricing strategies to stay competitive, which could help lower inflation rates. Thus, Capital Economics suggests that the bank should reconsider its stance on potential imminent interest rate hikes.