Markets expect earlier rate hikes to quash inflation

The combination of the Fed’s more hawkish tone and the larger-than-expected rise in UK CPI inflation in May to 2.1% has led the financial markets to bring forward their expectations of when the Bank of England will raise interest rates from around the end of 2022 to shortly after the middle of 2022. Our forecast that inflation will fall back below 2.0% next year suggests that policy won’t be tightened until later, perhaps not until 2024. What’s more, when the Bank does start to tighten policy, we think it will unwind some quantitative easing first before raising interest rates, perhaps in 2025. This suggests there is scope for market rate expectations to fall back and the recent flattening of the gilt yield curve to be reversed. We are hosting a Drop-In at 1400 BST/0900 ET on Thursday 24^th June shortly after the MPC meeting to discuss if the Bank of England will soon follow the Fed by signalling a willingness to bring forward the withdrawal of policy support. You can register here.