A 'cocktail' of sticky inflation and a tight labor market boosts Bank of England rate hike bets

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A tight labor market and comparatively slow return to earth for inflation means the Bank of England is likely to press ahead with a further interest rate hike in March, economists suggest.

"This means the Bank's Monetary Policy Committee is likely to deliver another rate hike next month, with some chance of further tightening at subsequent meetings if wage growth measures remain inconsistent with the Bank's 2% target."

The 10.1% January inflation figure was exactly in line with the Bank's projections, with four of the twelve consumer price index divisions making downward contributions to the headline inflation rate. The largest came in the form of a 7.2% annual fall in used car prices, while petrol and diesel price inflation also continued to cool.

"The Bank of England will be pleased to see that services inflation is starting to subside, as this tends to be more persistent than goods inflation," said PwC Economist Jake Finney. "They will also be reassured by the latest data indicating that private sector wage growth is easing. However, our view is that the Bank of England hasn't seen quite enough to shift the dial — so we expect them to deliver one last 25bp rate hike in March."Despite the increased market pricing for a further 25 basis point hike in March, U.K. government bond yields fell sharply across the yield curve on Wednesday morning before recovering slightly.

 

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