The consensus among analysts is near-unanimous that the BOE will keep rates unchanged at the upcoming meeting. Where the market could react more strongly is in potential changes to expectations for next year. And that could come down to how the vote plays out.
A lot has happened since the last meeting. Chiefly, inflation has come down, and the UK labor market was reported as weaker. On Tuesday, the ONS revealed that average wage growth was 7.2%, which was below the 7.7% that markets had forecast. Although that is still well above the BOE’s inflation target, it’s seen as moving in the right direction. That added to the good news after the inflation rate fell faster than expected to 4.6%.
Pricing In the Cuts
Market participants are no longer talking about hikes for the BOE, but when the next cut will happen. This allows for some surprise to the upside if the UK banking regulator decides to stick with a more hawkish tone despite the recent data.
There is a widening gap between the market and economists as well. The latter see that the BOE will cut rates only once next year. Meanwhile, markets have already fully priced in at least two cuts for the same period. Economists seem to be more aligned with the BOE than the market, as Governor Andrew Bailey has routinely insisted that rates will have to remain high for longer. Other members have also been adamant about it being too early to talk about cuts.
Counting the Votes
In order to gauge the hawkish or dovish leaning for the BOE, investors are likely to be most interested in the vote count. The last time around, 6 members voted for a pause, and three dissented calling for another quarter point rate hike. To match projections that the BOE has moved to a holding pattern and their next move will be a cut, it’s likely the market will expect to see a unanimous vote to pause.
But, if the same members insist on hiking, or if the count increases by one, then the market would likely be shocked by the BOE’s hawkishness. This could give the pound some substantial upside, particularly as the markets are looking for other major central banks to veer into cutting soon. But only a small number of economists see this as a possibility.
Focusing on the Outlook
After the BOE’s meeting, the economic calendar for major monetary policy decisions is essentially over for the year. Investors are likely to be setting their eyes more on how markets will perform after the holidays. This could keep the price action muted, particularly if the result is closer to benign in line with market or economists’ projections.
Investors will then be looking at the BOE’s annual forecasts for inflation, with the market reaction potentially hinging on whether the inflation outlook is cut. The BOE has repeatedly said it is worried about tightens in the labor market, which is driving inflation. Slower economic growth forecasts from the BOE could lead to a perception of dovishness and drag on the pound.
