Bank of England's conundrum deepens as inflation and labor market stay hot

cnbc.com:

LONDON — The Bank of England is «caught between a rock and a hard place» as it prepares for a key monetary policy decision against a backdrop of sticky inflation and a tight labor market, economists say.

May's consumer price index figure will be published Wednesday morning, the day before the Bank's Monetary Policy Committee (MPC) announces its next move on interest rates.

Data points since the last meeting have indicated persistent tightness in the labor market and strong underlying inflationary pressures, alongside mixed but surprisingly resilient growth momentum.

Economists therefore now expect the Bank to prolong its tightening cycle and lift interest rates to a higher level than previously anticipated.

British 2-year government bond yields rose to a 15-year high of 5% on Monday ahead of the expected announcement of yet another 25 basis point rate increase on Thursday.

Since November 2021, the the central bank has embarked on a series of hikes to take its base rate from 0.1% to 4.5%, and market pricing now suggests it may eventually top out at 5.75%.

Headline CPI inflation came in at 8.7% year-on-year in April, down from 10.1% in March, but core CPI (which excludes volatile energy, food, alcohol and tobacco prices) increased by 6.8% compared to 6.2% the previous month.

The Organization for Economic Cooperation and Development projected earlier this month that the U.K. will post annual headline inflation of 6.9% this year, the highest level among all advanced economies.

Adding to policymakers' collective headache, labor market data last week came in far stronger than expected. Unemployment defied expectations to fall back to 3.8% while the inactivity rate also fell by 0.4 percentage points.

Regular pay growth