# BoE set to walk the line between inflation and recession
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-04-27
Category: FINANCE
Category URL: https://financedigest.com/category/finance
Meta Title: Bank of England to Raise Interest Rates Amid Inflation Surge
Meta Description: Stay updated on the Bank of England's balancing act between tackling inflation and avoiding recession as interest rates head for a 24-year high.
URL: https://financedigest.com/boe-set-to-walk-the-line-between-inflation-and-recessionhtml

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By William Schomberg

LONDON (Reuters) – The Bank of England next week will try to walk what Governor Andrew Bailey calls a “very tight line” between tackling inflation speeding way above the BoE’s target and not triggering a recession.

The BoE is expected to raise interest rates at a fourth meeting in a row on May 5, the first time it has done that since 1997, as it moves faster than other central banks to tackle the surging price growth that they once described as transitory.

[Financial markets have fully priced in a quarter-point rise in Bank](https://www.financedigest.com/inflation-trumps-financial-risks-as-central-bank-tightening-set-to-continue.html "Inflation trumps financial risks as central bank tightening set to continue") Rate to 1.0%, its highest since 2009, and investors are more focused on what the BoE signals about its next moves.

Bracing for a big hit to household incomes, the [BoE in March toned down its message about rate](https://www.financedigest.com/fed-rates-up-boe-up-ecb-up-stocks-up.html "Fed rates up, BoE up, ECB up, stocks up") hikes, saying “some further modest tightening might be appropriate in the coming months,” having previously said it was likely.

Since then, [inflation has accelerated](https://www.financedigest.com/hsbc-puts-2022-buyback-ambitions-on-ice-as-inflation-accelerates.html "HSBC puts 2022 buyback ambitions on ice as inflation accelerates") to 7%, more than three times the BoE’s target. But the economy is also showing [slowdown signs](https://www.financedigest.com/adecco-sees-signs-of-a-hiring-slowdown-at-start-of-2023.html "Adecco sees signs of a hiring slowdown at start of 2023"), deepening the BoE’s dilemma.

We are now walking a very tight line between tackling inflation and the output effects of the real income shock, and the [risk that that could create a recession,”](https://www.financedigest.com/high-inflation-recession-risk-widen-ecb-dilemma.html "High inflation, recession risk widen ECB dilemma") Bailey said last week.

The BoE may try to convince [investors again that it will not raise rates](https://www.financedigest.com/hotel-investors-should-they-be-worried-about-a-potential-economic-pause-delving-into-inflation-interest-rates-recession-etc.html "‘Hotel Investors – should they be worried about a potential economic pause?’ delving into inflation, interest rates, recession etc") as much as they expect. Rate [futures are pricing Bank](https://www.financedigest.com/bank-of-the-future.html "Bank of the future") Rate hitting 2.25% by the end of this year with an outside chance of a 50 basis-point hike next week.

But [markets are also heeding the weakening economy](https://www.financedigest.com/digital-ad-market-shows-signs-of-life-but-economy-clouds-2023-outlook.html "Digital ad market shows ‘signs of life’ but economy clouds 2023 outlook"). [Sterling fell to a 21-month low](https://www.financedigest.com/sterling-plunges-to-all-time-low-in-scathing-appraisal-of-fiscal-plan.html "Sterling plunges to all-time low in scathing appraisal of fiscal plan") against the U.S. dollar on Wednesday.

Economists polled by Reuters mostly expect [Bank Rate](https://www.financedigest.com/bank-of-england-set-to-hike-to-4-as-rate-peak-looms.html "Bank of England set to hike to 4% as rate peak looms") to rise to 1.5% by early 2023 and stay there throughout the year.

Not everyone agrees. Consultancy Capital Economics thinks the BoE will have to take rates to 3% in 2023 after [inflation hits 10% this year and the tight labour market](https://www.financedigest.com/hungarys-booming-wedding-market-doused-by-soaring-inflation.html "Hungary’s booming wedding market doused by soaring inflation") pushes up pay.

Data on Wednesday showed [employers were starting to offer the biggest annual pay](https://www.financedigest.com/uk-employers-see-slight-fall-in-pay-awards-over-2023-xperthr.html "UK employers see slight fall in pay awards over 2023 – XpertHR") rises since 2008, but the increases were still not keeping up with inflation.

Admittedly, by focusing on containing any second-round effects on wages and prices, the Bank risks tipping the [economy into recession,”](https://www.financedigest.com/german-economy-expected-to-skirt-recession-economy-ministry-report.html "German economy expected to skirt recession – economy ministry report") Capital Economics’ Paul Dales said.

[INFLATION TARGET](https://www.financedigest.com/the-mouse-that-roared-new-zealand-and-the-worlds-2-inflation-target.html "The mouse that roared: New Zealand and the world’s 2% inflation target") SIGNAL

As well as the BoE’s language next week, its [inflation forecasts will signal how quickly it might raise rates](https://www.financedigest.com/german-inflation-rate-to-ease-over-course-of-2023-econ-minister.html "German inflation rate to ease over course of 2023 – econ minister").

In February it saw inflation falling to 1.6% in three [years’ time](https://www.financedigest.com/30-years-of-excel-lence-time-to-move-on.html "30 YEARS OF EXCEL-LENCE: TIME TO MOVE ON?"), based on investors’ bets on future rate hikes. That was the biggest [projected undershoot of its 2% target in a decade](https://www.financedigest.com/polycaprolactone-market-is-projected-to-expand-at-an-impressive-cagr-of-10-over-the-next-decade-to-be-valued-2-5x-its-current-side-by-2030.html "Polycaprolactone Market Is Projected To Expand At An Impressive CAGR Of 10% Over The Next Decade, To Be Valued 2.5X Its Current Side By 2030").

The war in Ukraine has added to immediate [price pressures and the BoE might raise its 8% inflation](https://www.financedigest.com/oil-ticks-up-as-u-s-inflation-cools-but-prices-set-for-monthly-drop.html "Oil ticks up as U.S. inflation cools, but prices set for monthly drop") peak forecast. But the slowing economy could push its medium-term [inflation forecasts even lower than in February](https://www.financedigest.com/french-inflation-revised-upwards-in-february-to-7-3-final-figures.html "French inflation revised upwards in February to 7.3% – final figures").

Consumer confidence has slumped close to a record low, retail [sales have fallen for two months and there have been some early hints of a slowdown](https://www.financedigest.com/logitech-quarterly-sales-fall-22-as-slowdown-fears-bite.html "Logitech quarterly sales fall 22% as slowdown fears bite") in job creation, potentially easing the BoE’s fears about a price-wage spiral.

The latest data are starting to vindicate its [expectation of a demand slowdown,”](https://www.financedigest.com/ea-lowers-bookings-expectation-on-strong-dollar-gaming-slowdown.html "EA lowers bookings expectation on strong dollar, gaming slowdown") HSBC economist Elizabeth Martins said.

She expected eight of the BoE’s nine [rate-setters to vote for a 25 basis-point rate increase with Deputy Governor Jon Cunliffe again voting to keep Bank](https://www.financedigest.com/boes-bailey-says-rate-setters-can-put-inflation-before-bank-worries.html "BoE’s Bailey says rate-setters can put inflation before bank worries") Rate unchanged, repeating March’s vote pattern.

In February, before the slowdown signals, four MPC members voted for a 50 basis-point [rate hike](https://www.financedigest.com/hopes-of-slowdown-in-rate-hikes-bolster-shares-ahead-of-u-s-gdp.html "Hopes of slowdown in rate hikes bolster shares ahead of U.S. GDP"). Five backed a 25 basis-point increase.

The [BoE might also hope to show it can tackle inflation without a string of new rate hikes](https://www.financedigest.com/uk-economys-unexpected-bounce-spurs-more-boe-rate-hike-talk.html "UK economy’s unexpected bounce spurs more BoE rate hike talk") by detailing how it will sell down the almost 850 billion pounds ($1.1 trillion) of government bonds it holds after a decade of asset-purchase stimulus.

The central bank has [previously said it would consider beginning bond sales when Bank Rate hits](https://www.financedigest.com/uk-economy-set-for-smaller-hit-in-2023-than-previously-feared-imf.html "UK economy set for smaller hit in 2023 than previously feared – IMF") 1%.

($1 = 0.7957 pounds)

(Writing by William Schomberg; Editing by Hugh Lawson)


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