There is a near-unanimous consensus that the BOE will keep rates unchanged at the end of its meeting on Thursday. However, there are several key data points coming out the day before and just hours ahead that could change the outlook on the decision. Market uncertainty about oil prices could exacerbate the situation, generating particularly high volatility for pound pairs over the next couple of days.
The BOE is seen on a hiking path now amid higher inflation. Just yesterday, the shadow MPC, which attempts to forecast what the BOE will do at the upcoming meeting, voted to raise rates. The inflationary pressure is being driven by higher oil prices in the wake of the war with Iran, which could end as soon as Friday. If crude prices drop after the Strait of Hormuz is opened, then the BOE should return to its easing bias. This leaves considerable uncertainty, and the BOE could try to buy some time and leave the market with a more dovish impression than warranted.
The Uncertain Outlook on Rates
Economists are unanimous on Thursday’s hold, and the market agrees, with near-100 % odds in futures markets that rates will stay unchanged. That’s as far as the agreement goes. The outlook diverges considerably after the upcoming meeting.
A majority of economists, according to the latest Reuters poll, predict rates staying unchanged for the rest of the year. This is at odds with the market, which is pricing in a high chance of at least one rate hike by December. There is a growing minority of economists who see one rate hike. But there is also a small minority of economists who predict a cut. However, this poll was conducted before the announcement of a tentative deal to open the Strait of Hormuz. That means the odds could shift as crude prices are expected to fall.
The Data Disrupting the Outlook
All of the above assumes that key data points coming out this week will largely match expectations. That includes Wednesday’s inflation data, with headline CPI anticipated to jump to 3.1% from 2.8% a month earlier. Almost the entirety of that increase is attributed to rising energy costs. The core rate is projected to rise to 2.6% from 2.5% previously, indicating that higher crude prices are starting to filter through to the broader economy. That could be a sign that the BOE might have to hike at least once to get inflation back in line.
Then, just hours before the decision on Thursday, the UK employment change comes out, anticipated to show 80K jobs created in April, down from 148K a month earlier. This is above the normal trend and could indicate easing slack in the jobs market, giving the BOE the option to keep rates elevated. The unemployment rate is anticipated to stay unchanged at 5.0%.
How the Market Could React to BOE Meeting
If the data beats expectations, that would give the Bank of England reason and room to keep rates elevated. It’s unlikely there will be a hike, but it could mean a more hawkish split in the vote and rhetoric in the aftermath of the meeting.
On the other hand, if the data is in line or mixed, the BOE could try to hold off until new data is available. That would look like a unanimous vote to leave rates unchanged, with cautious commentary from Governor Andrew Bailey. This might surprise the market, as traders are looking to count the number of dissenting votes in favour of a hike. The more votes to hike, the more hawkish the market will interpret the results.
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