BoE policymakers, led by governor Andrew Bailey, may put more weight on markets than the Treasury’s fiscal stimulus. — Bloomberg
LONDON: In normal times, Chancellor of the Exchequer Jeremy Hunt’s decision to pump more than £20bil (RM108.8bil) a year into the UK economy might tip the Bank of England (BoE) toward raising interest rates again.
But growing turmoil in financial markets may well overshadow next week’s rate decision from the central bank.
Investors rapidly pared back bets on another quarter-point increase in the BoE’s key lending rate after concerns about the health of Credit Suisse led to a sell-off of bank shares on Wednesday.
Concerns about inflation lingering near a four-decade high are rapidly giving way to worries about the confidence in the banking system, which has been unsettled since the collapse of SVB Financial Group in the United States last week.
The result may be that BoE policymakers, led by governor Andrew Bailey, put more weight on markets than the Treasury’s fiscal stimulus.
“Today’s budget argues for a little bit more tightening by the BoE,” said Thomas Pugh, an economist at RSM UK who had seen a 50% chance of a rate hike next week.
“But the flare up of risks around Credit Suisse today and associated moves in financial markets makes that probability even smaller.”
Hunt’s budget set aside money to cushion households against soaring energy and child care costs. It also gave companies a tax break for investing and allowed savers to shelter more of their income in pensions. The result is a £91bil (RM495bil) fiscal stimulus through 2028.
George Buckley, chief UK economist at Nomura, said the stimulus “is not peanuts” and “was rather larger than we had been expecting”.
“That will not be something that will pass the BoE by,” Buckley said. “These numbers will feed into the bank’s models and its policy discussions.”
Just a few weeks ago, investors were certain the BoE would raise the benchmark lending rate a quarter point to 4.25% on March 23, continuing the quickest tightening cycle in three decades.
Policy makers were looking at signs that inflation was proving more persistent than it expected, threatening a wage-price spiral.
Now, that decision is on a knife-edge and markets have priced in only one more hike by this summer.
Markets quickly shifted after the SVB collapse and have moved more sharply since then. — Bloomberg
