Amid the numerous central bank meetings this week, the Bank of England meets tomorrow and is fully expected to sit on its hands. The MPC reduced rates in August by 25bps to 4.0%, and that was deemed a ‘hawkish cut’ in line with its quarterly pace of moves. Stubborn inflation held at 3.8% in August and is much higher than in the US (2.9%) and the eurozone (2.1%), while the growth picture is downbeat. This all means the Old Lady will stand pat with markets not pricing in a full quarter point rate cut until next year.
The MPC is very likely to stick to its guidance repeating that a “gradual and careful approach to removing monetary policy restraint remains appropriate”. The vote split is expected to be 7-2 with the majority voting for an unchanged decision and Dhingra and Taylor voting for a 25bp cut. As reminder, we saw an historic 5-4 vote split at the prior meeting, with a second round needed where Taylor opted to switch to a shallower 25bps to avoid an unchanged rate. The hawkish vote split saw a scaling back of dovish BoE bets and data since the meeting has added to the dwindling expectations of further policy loosening.
Recent economic data
Since the August rate decision, Q2 GDP came in modestly firmer-than-expected at 0.3% q/q, and the August PMI composite PMI moved further into expansionary territory. This week’s labour market has continued to gradually cool with pay growth easing slightly and the August jobless rate unchanged at 4.7% Payroll changes were modest, but the biggest fall in private sector workers outside of the pandemic is forecast by economists to take wage growth below 4% by year end.
Today’s inflation data came in line with estimates, though notably services inflation cooled from 5.0% to 4.7%. This is still sticky with food prices elevated and the headline above the BoE’s expectations. Indeed, that metric isn’t expected to peak until next month at 4%, with that data released just ahead of the next BoE meeting.
Commentary from MPC members earlier this month continued to convey caution over the persistence of underlying inflation. This signals little motivation for rate seters to ease policy at this meeting. Until now, the MPC has opted to cut rates on a quarterly basis, alongside MPR meetings, and the next one of these is on 6th November.
Market reaction
Given the hawkish vote split last month and expectations of continued elevated inflation, markets only price 8bps of cuts this year and total of 40bps by next summer. Aside from the rate decision and vote split, attention will be on the MPC’s announcement on Quantitative Tightening which is expected to slow GBP 70bln per annum from October (vs. the prior GBP 100bln).
Consensus sees the BoE in wait and see mode which should imply a preference for not rocking the boat. That might mean a relatively quiet market reaction, with cable driven more by the FOMC meeting and the likelihood of Fed rate cuts going forward. The pound broke to the upside yesterday with bulls eyeing up the multi-year high set at the start of July at 1.3788.