Editor’s note:
On Friday, the BOE announced it would delay the MPC meeting by one week due to the death of Queen Elizabeth II; the meeting will be held at the same time on Sept 22.
Earlier this week, cable dropped to lows not seen in decades. Since then, it has bounced back a bit, but it spun up speculation about what to expect from the BOE next week. Some analysts are pointing to the widening interest rate cap between the pound and dollar. The BOE started raising rates first, but has been slower to tighten policy and inflation outpacing the US. With more double-digit inflation expected, pressure is mounting on the BOE to take more drastic action.
But there isn’t any certainty about what the bank will do next week. Although a small majority are expecting another 50bps hike, there is a growing contingent calling for a 75bps hike. Both major peers, the ECB and Fed, have not only already done “triple” rake hikes, but are widely expected to do so at their next meetings. But, there’s a problem trying to figure out what the BOE will do, which is that there is a series of key data expected to be released early next week ahead of the meeting. Those data points might shape policy expectations right up to the meeting, so we could have increased cable volatility through the coming days.
What could move the markets
On Monday we have the release of monthly GDP, expected to show another month of negative growth, though not as much as before. UK July GDP is expected to come in at -0.1% compared to -0.6% in June.
On Tuesday it’s the turn of employment figures. The BOE has not been particularly worried about the job market as it’s focusing primarily on inflation. But the earnings data could be relevant for demand-side pressures on prices. And that, in turn, could be impacted by how tight the labor market is. So lower wages and increasing claimant count, as expected, might be an argument in favor of a 50bps hike instead of a 75bps one.
UK August Claimant count is expected to deteriorate a bit to -4K from -10.5K in July. Remember that the more negative this number is, the better it is for the economy, since it’s the number of people seeking job benefits. July’s unemployment rate is expected to remain steady at 3.8%. But July Average Earnings are expected to slow growth to 4.6% compared to 5.1% prior. Note that this is in the context of inflation of 10.1%, implying further erosion of employee purchasing power.
On Wednesday is the most important data, since the BOE is trying to get inflation down. But there aren’t any forecasts for inflation this far out. Particularly after the ONS delayed publication of statistics for Friday until next week, due to the passing of the Queen.
Although it’s expected that inflation will increase, a higher CPI would increase pressure on the BOE to take more drastic action. This could be the point at which markets definitively price in expectations for the BOE, which meets the very next day.
Also on Wednesday is the release of PPI figures, which are seen as a precursor to the trend in inflation. It’s not expected for inflation to meaningfully adjust if producers have to keep raising prices. However, there could be a little less relevance this time around as the potential energy cost reduction plan from the new Government could help reduce costs. However, the exact mechanism and inflation impact has still not been sketched out. Chancellor Kwarteng is expected to give more details later in the month.
