LONDON — The Bank of EnglandIt is anticipated that the Federal Reserve will vote for its fourth consecutive increase in interest rates on Thursday. However, economists are concerned about how it may be moving into increasingly uncertain waters.

The U.K.’s annual inflation reached a new 30-year record of 7% in March. Food and energy prices continue to rise. Despite fears that Russia’s invasion of Ukraine will slow down economic growth, consumers have lost confidence.

The Bank increased its interest rates by 0.75 percent at their March meeting. On Thursday, the Monetary Policy Committee will meet and expect an additional 25 basis points to increase the rate to 1.

As many central banks across the globe, the Bank has to rein in inflation while not encouraging growth.

Andrew Bailey noted recently that the Bank has been walking a “narrow track” between growth and inflation. This suggested that the Bank could look for a more incremental approach rather than following U.S. Federal Reserve’s lead with a 50-basis point increase.

MPC forecasted that inflation would peak at 7.25 percent in April. But economists believe it will rise higher than this, and continue to climb for longer time due to Russia’s invasion and subsequent jump in commodity prices.

In light of inflationary pressures, Kallum Pickering (Berenberg Senior Economist) stated in Tuesday’s note “BOE Preview: A Risky Hike” that the Bank’s much-anticipated hike “is not without risk”

“On a policy relevant horizon – of say two years from now – the Putin shock will probably depress demand growth, which may also affect inflation dynamics over time. Pickering stated that the U.K. has entered the very early stages of recession if we’re unlucky.

“Amid unusual uncertainty, policymakers – who should aim to minimize output losses over the business cycle – would better keep policy unchanged for now until incoming data dictate the appropriate policy response.”

The MPC had projected persistently high inflation before the conflict in Ukraine. James Smith, ING Developed Markets Economist, said that new forecasts released Thursday will likely show that this growth-inflation-trade-off has only increased since.

He said, “The net result will be an inflation forecast of around 9% in April that stays below that level through 2022 and an economic outlook with at least one quarter of negative growth for this year.”

Emerging division

The uncertainty of the terrain creates the possibility for policymakers to be less consistent. MPC voted 8-1 for March’s 25-basis point increase. Deputy Governor John Cunliffe pointed out the dual risks to inflation as the reason he voted to maintain the bank rate at the current level.

Smith said that any signs of increasing discontent would indicate to the markets that the rate-hike cycle might be about to end.

“The question for this week is whether the rising risks to demand will motivate other policymakers to side with Cunliffe – who will likely continue to support a wait and see approach,” Berenberg’s Pickering said.

Markets OIS (overnight Index Swaps) predicts that the BoE will raise six times more in 2022 in order to bring the bank rate up to 2.25%. Any more dissensions for keeping the rates at 2.25% would be considered a surprise.

Yet, there is no beginning to sell bonds

The Bank began unwinding its balance sheet in February, passively reducing the record £875 billion of U.K. gilts held at the start of the year, by not reinvesting maturing assets and actively selling its much smaller £20 billion of corporate bonds.

Pickering observed that although the guidance of the central bank suggests it might begin active gilt sale when the bankrate is 1%, there are increased risks associated with market volatility as well tightening financial circumstances making it less likely to do so on Thursday.

“In case the BoE does begin active gilt sales, it is likely to start very gradually – probably at a pace of no more than £1bn per week – so that the policymakers have scope to assess the market impact and adjust the pace thereafter if necessary,” he said.