The barrage of UK data over the last couple of weeks has failed to clear up the outlook for the Bank of England (BOE)‘s key meeting on Thursday. Overall, the economic figures painted a divided landscape, pushing the central bank in opposing directions and raising market uncertainty. The pound wobbled, but the odds of a rate hike increased, leaving the decision close to a knife’s edge.
On Tuesday, the jobs numbers were particularly bleak, despite the headline unemployment rate staying unchanged. The number of open positions fell to the lowest level since the pandemic amid stagnating hiring. Wage growth was also the lowest in years, reducing Britons’ purchasing power. Worse, not only was net job creation worse than expected, but the prior month was also revised lower. The picture was of significant and growing slack in the labor market.
So, Why Hike At All?
On Wednesday, headline CPI rose to the highest level since March, but it was well within expectations. The problem is that there is a lag in energy bills, and as higher crude prices have persisted, domestic energy bills are slated to rise later in the year, keeping inflationary pressure up. Despite the sluggish economy, services inflation remains persistently well above target at 3.4%, unchanged from a month earlier.
The core rate has stabilized at 2.6% since May, which is comparatively good, given how the other measures have been increasing. The problem is that it remains above the 2.0% target, which means the BOE will likely need to take action to bring consumer prices back in line.
What Are the Odds of a BOE Hike?
The market is currently pricing in a 43% chance the Bank of England will raise rates on Thursday, and 93% odds by the end of the year. Therefore, the market’s issue is not whether the BOE will hike, but when. A hawkish interpretation for the market will likely be if the BOE lays the groundwork for a 25bps rate hike at the November 5 meeting.
A dovish takeaway would be the BOE deciding to hold rates unchanged and suggesting that rates don’t need to rise soon. This would leave the market pricing in a rate hike in December at the earliest, which could weigh substantially on the pound.
Why the Decision Might Be More Dovish Than Expected
The market is pricing in a relatively high chance of rate tightening, so the hold in itself could have a dovish impact. To counteract that, the BOE and Governor Andrew Bailey would have to provide a substantially hawkish tone. Investors will be paying close attention to the rate split. The expectation is a 6-3 vote in favor of a hold, with the dissenters voting to increase rates. A higher number of dissenters would be hawkish and support sterling.
One potential indicator that the Bank of England might be dovish is when economists disagree with the market’s outlook. Since the central bank is made up of economists, they tend to have a similar way of thinking. Economists not only expect a hold on Thursday but also predict policy to remain unchanged for the rest of the year.
