The Bank of England is expected to hold interest rates at record lows and maintain its massive asset purchase program on Thursday, but investors will be looking out for hints at tightening next year.

The central bank’s latest monetary policy meeting will be a swan song for hawkish chief economist Andy Haldane, who has warned that the “tiger of inflation” is incoming and urged policymakers to cut the bank’s £895 billion ($1.24 trillion) quantitative easing program by £50 billion.

U.K. consumer price inflation came in at 2.1% in May, exceeding forecasts and surpassing the bank’s 2% target for the first time in almost two years. Core inflation, which excludes volatile food and energy prices, picked up from 1.3% in April to 2% in May.

The bank projects inflation to hit 2.5% by the end of the year, but consensus remains that the spikes in inflation will be transient. Meanwhile, the labor market and other economic indicators are showing signs of recovery, prompting some speculation that the bank could indicate a path out of its extraordinarily loose policy stance. The main policy rate remains at a historic low of 0.1%.

The U.S. Federal Reserve recently surprised markets with a hawkish turn, raising inflation expectations and bringing forward its tightening schedule to forecast two rate hikes in 2023.

The BOE’s May meeting saw the Monetary Policy Committee split on whether to scale back QE, but it did signal the future tapering of asset purchases.

However, it has thus far avoided anything committal on the timing of the first interest rate hike, reiterating that more significant and sustained progress on the economic recovery would need to be evidenced.

Labor, inflation and the delta variant
“The run of economic data has been encouraging over recent weeks – and indeed it’s clear the economy is now outperforming last summer when restrictions were also low,” said James Smith, developed markets economist at ING.

“But the Bank’s view on growth has already been towards the more optimistic end of the spectrum, and the spread of the new Delta variant adds an extra dimension of uncertainty (though our view for now is that the economic impact probably won’t be huge). We also doubt the Bank will feel too compelled to shift market expectations as they currently stand.”

ING anticipates a first rate hike in the first quarter of 2023, with inflation dying down into mid-2022 as the spikes triggered by the reopening of the economy fade, reducing pressure on policymakers. However, the Dutch bank’s analysts said in a note Monday that they “certainly wouldn’t rule out” an earlier hawkish pivot.

“Possible triggers could include a more rapid unwinding of household savings, given the economic outlook is particularly sensitive to even small percentage changes in the amount of the savings stockpile that is spent (the BoE assumes roughly 10%),” Smith said.

“Wage growth is also key, and there are already anecdotal reports of firms facing shortages of staff in hospitality, though our feeling is that this is likely to prove temporary.”

Tightening labor market could be ‘real issue’ for markets: strategist
Similar to the recent trend in the U.S., the labor market is causing some analysts to suspect that inflation may be more resilient than previously thought. The Recruitment and Employment Confederation showed vacancies in April rising at their steepest level in 23 years, with pinch points in health, hospitality, transport and construction.

This has fed through to higher wages, with annual earnings growth jumping to 5.6% in the three months to April, noted Katharine Neiss, chief European economist at PGIM Fixed Income.

However, Neiss expects the BOE to adopt a wait-and-see approach during this meeting, with rising cases of the delta Covid-19 variant a continued concern and large numbers of U.K. workers remaining on furlough.

“Key Brexit milestones towards further trade de-integration between the U.K. and the EU will happen later this year, adding further uncertainty to the outlook,” she said.

“Finally, unlike the U.S., the U.K. government has taken a decidedly hawkish stance on fiscal policy, stressing the need for balancing the books and reigning in spending. These factors are expected to weigh on the recovery and inflation beyond the very near term.”

To temper any inflation “hysteria,” the MPC will need to emphasize vigilance, Neiss added.

“Here the BOE is at an advantage relative to its larger DM peers – as a small open economy, it has experienced significant inflation overshoots – both in magnitude and longevity – that the MPC has successfully steered back to target, while maintaining a remarkable degree of stability in medium term inflation expectations,” she said.

“So while the MPC would do well to communicate it is keeping a close eye on inflationary pressures at its next meeting, it needn’t bang on the table about it.”