Bank of England Meeting Preview:Does the MPC follow other central banks with a 75bp hike?

21/09/2022

The postponed Bank of England meeting takes place tomorrow with the rate decision scheduled for 11.00 GMT. Markets are betting that the MPC may have to speed up its rate hike path for the second meeting in a row, as inflation hovers around 10% while the pound sinks to new multi-decade lows.

The UK economy is suffering at present with policymakers at the Old Lady forecasting an incoming near two-year recession at its August meeting. While they decided to accelerate the pace of rate hikes to 50bps, it was also clear that expectations of slower growth were not standing in the way of more policy tightening with inflation at current levels.

Since that meeting, there has been evidence that economic data has weakened further while prices and inflation have increased. Consumer confidence has fallen to record lows, recent retail sales prints have been weak, GDP fell in June by 0.6% and business surveys have softened. Meanwhile, while headline CPI dipped below 10%, but core prices continued to rise more quickly than normal. Wage growth also remained strong.

Mixed data sees market pricing differ from analyst expectations for this meeting. Money markets see a bigger 75bps rate hike taking rates to 2.5%, while consensus only sees another half-point rate rise. Markets then see rates over 3% into year end and a peak rate close to 4.5% next year.

The bank may also have to now consider the government’s latest package of fiscal measures that includes energy price cap support, tax cuts and cancellation of a planned rise in corporation tax. This will add to inflation concerns and could mean rates are kept higher for longer. On the other hand, we may get quantitative tightening from the bank which would be a factor supporting a smaller 50bp rate move.

One final issue to consider is the plunging pound, which could make policymakers more inclined to go with a jumbo-sized hike. Cable is down over 16% this year and this will particularly be an issue for the hawks. A falling exchange rate is undesirable during periods of high inflation as it worsens inflationary pressures by making imports more expensive.

Here are the numbers to know ahead of the meeting: