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BOE Set to Hike, With Considerable Doubts Over What’s Next

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There is a pretty solid consensus that the BOE will hike when it meets on Thursday. But there is a major caveat for those projections: The UK will release its all-important CPI figures the day before the meeting. If inflation is considerably different from the current expectations, then it could shake up the projections for the BOE and cause cable to bounce around.

As things stand now, around 80% of economists expect the BOE to hike, but there is little consensus after that. That means that most of the attention will be on Governor Andrew Bailey’s press conference after the rate decision to see what kind of hints he drops for the November meeting.

Time is running out

Right up until the start of the blackout period, the BOE hawks were quite adamant about the need to keep raising rates. MPC Member Catherine Mann, for example, said that if there was doubt about whether or not to hike, it was better to tighten. She pointed to the too-high inflation.

But there is a growing chorus of analysts who worry that if the BOE doesn’t get its hiking in now, it won’t have a chance later. This grew particularly strong after the UK GDP figure for July disappointed, dropping -0.5% in a single month. With high prices squeezing UK pocketbooks, and house prices declining from higher interest rates, it might just be that the British economy is about to slip into negative growth. Whether or not it will last long enough to meet the technical definition of a recession is beside the fact that it will make it considerably harder for the BOE hawks to justify further hikes later in the year.

What the data could say

Before that debate can happen, though, the August CPI figures need to be taken into consideration. The consensus of forecasts is for there to be not much change. The headline inflation rate is expected to move slightly higher to 7.0% from 6.8%, likely driven by higher energy prices that have been pressuring global prices.

Meanwhile the more important for monetary policy core inflation rate is expected to tick down to 6.8% from 6.9% prior. Though that has a certain caveat, in that the UK doesn’t consider the falling home prices in its shelter component. That means that higher rent costs could be putting upward pressure on the core figure, without considering the increased costs for housing derived from higher interest rates.

What it all means for the markets

The forecast for generally sticky inflation is the main justification for expecting another rate hike. But if inflation were to come down substantially, then it could easily recalibrate expectations for what could happen after the Thursday meeting. For now, inventors expect a somewhat unambiguous statement that rate hikes will likely continue higher. But if inflation starts to come down dramatically as BOE Governor Bailey has predicted, then the balance could finally switch to the doves.

But if inflation comes in higher than expected, raising the prospect for a higher terminal rate, the pound might not benefit all that much. That’s because the appreciation from the higher rates might be offset by rising worries the country could fall into a recession.

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