The BOE is the last of the major banks to hike this cycle, and the expectation is that it will follow its peers – with a twist. Last week, the ECB and the Fed both hiked by a quarter of a point, but then implied that further rate hikes would be data-dependent. The ECB bias was for another hike, the Fed for a pause; but both left the door wide open for this being the top of the rate-hiking cycle.
The BOE, on the other hand, is facing persistently high inflation and likely doesn’t have the luxury to imply it’s at the terminal rate. The latest report showed inflation in the double digits, while the BOE had forecast that inflation would come down precipitously during the last quarter.
Patience is running out
The BOE might have been the first to start hiking, but its plodding pace of hikes has apparently let inflation keep rising. Unlike the ECB and the Fed, where rate decision votes have been unanimous, the vote from the BOE to keep up the pressure on inflation has been divided. The current theory among central bankers is that it’s the expectation for lower inflation that drives down prices.
The theory argues that central banks need to have the “credibility” to fight inflation, which means that market makers have confidence that the necessary rate hikes will happen. A disunited front, and vacillating vote counts, can be seen as hurting that sense of commitment to bring prices down. At least some analysts and traders are likely to be looking at the split vote as a sign that the BOE won’t raise rates high enough or will bring them down too soon to keep prices in check.
What to expect
With a unanimous expectation that the BOE will hike by 25bps, the focus is likely to be on the vote split. MPC members Tenreyo and Dhingra have consistently voted against raising rates, arguing that dealing with the economy should be the first priority. If other members were to join in, with a 3-6 split, then investors might take it as a sign that the BOE is about to give up on its slow rate-hiking path. That could substantially weaken the pound.
Barring this occurrence, the BOE is expected to reiterate its stance that more policy action might be necessary to calm inflation. The forecast for the price growth outlook is likely to be updated, but for many traders, that might be just the BOE catching up with reality and unlikely to change market expectations.
With high inflation and near-zero growth, the UK is in a particularly difficult position for policymakers: stagflation. Traditionally, the only way to break out of that is through some kind of recession, either induced by monetary policy to bring down inflation, or a credit crisis driven by high inflation.
The BOE’s refusal to pick either of those options can be seen as trying to kick the can down the road to where it will be an even bigger problem. For traders, however, it means cable is likely to remain under pressure, unless Bailey surprises with some extra degree of hawkishness.