Market News

(Bloomberg) -- Bank of America said Britain’s inflation problem goes beyond that seen in other major economies, suggesting two more rate hikes this year and no cut before 2024.

The UK is harboring a toxic combination of labor market tightness and red-hot inflation, pushing up the expectations consumers have about the cost-of-living, said Robert Wood, BofA’s chief UK economist.

The UK’s exit from the European Union put the nation in a “unique” situation not confronting other countries, Wood said, noting Britons’ expectations of high inflation had begun to emerge after the 2016 referendum.  

“I am increasingly concerned that the UK, unlike other countries, has an inflation problem,” said Wood at a BofA media round-table event. “Expectations appeared to rise consistently post Brexit referendum. It was a first sign that there was a brewing problem.”

Wood expects the Bank of England to raise its key rate 25 basis points in both February and March. A 50 basis-point rise could still be on the cards for next month’s meeting if inflation remains higher than expected in tomorrow’s data.

He anticipates two rate cuts next year, assuming unemployment rises to 4.5% in 2023 and the cost-of-living crisis wanes in the second half of the year.

Several policymakers on the Bank of England’s Monetary Policy Committee share Wood’s concern that inflation expectations are becoming embedded. Last week, Catherine Mann said underlying inflationary forces in the UK still look “pretty robust.”

“Getting inflation expectations under control, keeping them under control, is important,” she said.

While inflation in the US has been spurred on by a tight labor market, and in the eurozone has been fanned by soaring energy prices, the UK has found itself caught in both trends.

December’s inflation reading for the UK, due Wednesday, is expected to show CPI falling to 10.5% in December from November’s 10.7%. That’s down from a 11.1% in October, a four-decade high.

(Corrects spelling of name in fourth, fifth paragraphs)