BoE Preview - Will There Be More Hikes?
The Bank of England is next up with their policy rate decision today.
According to Bloomberg, money markets are forecasting an 85% chance of a 25bps hike - is there any surprise awaiting us?
More specifically, is there a reason for the BoE to hike again ?
Looking at the data, the answer is, yes.
On one hand, the inflation remains a serious problem for the BoE, specially with a 10.1% CPI not moving much with 11th continuous hikes.
On another hand, the labour market remains robust with the UK adding 169K jobs and the Unemployment Rate still at 3.8%.
The next issue is the rate of increase in wages with a 5.9% increase year on year.
Setting aside the labour and inflation data, growth has been slightly better than expected.
At the beginning of 2023, economists forecast that the UK will enter a deep and protracted recession.
So far, this year has shown much better economic data compared to what markets had anticipated.
Therefore, if we look at all the data points, it would suggest the BoE has some more work to do.
Interest rate futures are currently pricing in just over 50bsp of tightening for this year, which means the money markets are pricing in another 25bps rate hike after today's hike.
It will be imperative to listen to Governor Bailey’s forward guidance, as to the plans for potential hikes throughout the year.
With that in mind, it’s worth noting that the bank will release an updated Monetary Policy Report (MPR) alongside this meeting.
The MPR document is very important as this highlights the banks views on all Macro data from inflation, growth, labour and interest rates.
Assuming we get a hike this week, the MPR will be scrutinized to see whether market pricing for another hike is in line with the bank’s view.
With inflation as high as it currently is, it would be strange to think the bank might consider pausing after this week’s meeting.
However, the bank won't base its decisions on the current actual rate of inflation, but rather on what they expect the inflation to be in the future.
With the base effects in mind, the BoE has previously noted that inflation could slow rapidly from the second half of the year.
The bank will guide markets on whether another hike will be needed after a potential hike this week through their inflation forecasts.
If the bank sees inflation undershoot their target meaningfully, that would be a sign to markets that they don’t see need for another hike after May.
However, if the bank sees inflation overshoot their target meaningfully, that would be a sign to markets that they see scope for more hikes after May.
The bank’s growth expectations will also be watched to see whether the recent data will see a more favourable growth outlook from the bank.
What can we expect from the Pound at the meeting?
On the rates side, markets already fully price in a hike, so getting one won’t surprise and shouldn’t impact the Pound if we do.
The Pound could be negatively hit if the bank decides not to hike this week.
As always, Sterling will also be sensitive to the vote split, to see whether another hike was unanimous or whether we had more dissenters.
The previous vote split was 7 voting for a hike, and 2 voting to leave rates unchanged.
Furthermore, the inflation and growth outlook will be watched closely for Sterling as well.
A rosier growth outlook followed by sticker than expected inflation forecasts could give Sterling a boost, while a bleaker outlook for growth and inflation could put Sterling under pressure.
With EURGBP testing key YTD lows on Friday, as well as the pair trading close to its 200DMA, the pair would be one to keep on the radar for this week’s BoE decision.
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