Harvest Global Markets :

UK inflation has exceeded expectations for the fourth consecutive month, with the Consumer Prices Index rising to 8.7% in May. The unexpected acceleration in core inflation to 7.1% has triggered speculation of a larger rate increase by the Bank of England (BOE). This scenario has prompted traders to place bets on a key rate of 6% by December, which would mark the highest level in over two decades. However, such measures could place significant pressure on borrowers, impact the housing market, and raise concerns about the broader economy.

The sustained high inflation in the UK has led to growing worries about its persistence, despite the BOE’s recent round of rate hikes. Core inflation, which excludes volatile food and energy prices, has hit a fresh 30-year high, underscoring the challenges faced by policymakers. This inflationary pressure is attributed to rising prices in used cars, airline tickets, and recreation and culture costs, indicating broader price pressures beyond food and energy. The high cost of living and potential rate hikes pose challenges for UK households amid a cost-of-living crisis. Prime Minister Rishi Sunak’s efforts to combat inflation face hurdles, while Chancellor Jeremy Hunt rejects mortgage support to avoid fueling price growth. The situation creates significant economic and political concerns for the government. Adding to the economic concerns, government debt in the UK has exceeded the size of the economy for the first time since 1961. This development jeopardizes Prime Minister Rishi Sunak’s pledge to restore fiscal health and curb inflation. The combination of high inflation and growing debt poses a challenging scenario for policymakers and raises questions about the outlook for the broader economy. Bloomberg Economics warns that such aggressive measures could result in a shallow recession, with negative GDP growth forecasted for 2023 and 2024.UK’s inflation situation contrasts with US and euro zone as their policymakers near end of tightening cycles. Market expects more rate hikes by Bank of England, unlike Federal Reserve and European Central Bank projections. Unique circumstances and risk of unhinged inflation expectations underscore perceived necessity for BOE to continue raising rates.

Expectations of additional interest rate hikes by the Bank of England have increased due to the UK’s persistent high inflation. Traders anticipate a key rate of 6% by December, reflecting concerns about inflation and the potential consequences of aggressive tightening. However, these measures could burden borrowers, impact the housing market, and create uncertainties for the broader economy. The UK’s unique position among major economies highlights the challenges policymakers face in managing inflation and promoting economic stability.