UK Monetary Tightening Continues - Responding to Higher-than-expected Inflation
The Bank of England (BoE) has raised its policy rate for a second consecutive time, in response to high and rising inflation in the UK. In line with the BoE's signal on the policy path, DBRS Morningstar expects further increases in Bank Rate this year, as inflation is yet to peak and labour markets are tight. In this commentary, we take a look at the monetary policy response to higher consumer prices in the UK, the inflation outlook and some of the credit implications of monetary tightening for the UK government debt.Key Highlights
• DBRS Morningstar views the BoE's monetary tightening in response to higher-than-expected inflation as in line with its mandate, trying to rein in inflation expectations.
• After increasing interest rates from low levels twice already since December 2021, the BoE is expected to rise interest rates further in 2022.
• UK inflation is yet to peak, forecast at over 7% in April 2022, largely reflecting high energy prices, while the labour market remains tight.
• Although UK government debt is now more sensitive to rises in interest rates than in the past, we expect higher interest payments to remain low and the overall debt profile to remain favourable.
“The Bank of England has started to normalise interest rates, from a very low level. This is completely in line with its mandate, in response to high and rising inflation. At the moment, we see limited implications to the UK government debt from higher interest rates” notes Adriana Alvarado, Senior Vice President in the Global Sovereign Ratings Group.
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