The Bank of England (BoE) Monetary Policy Committee (MPC) will announce the latest policy decision on Thursday, August 3rd.
The BoE will also release the latest Monetary Policy Report (MPR) which will contain an updated assessment of the outlook together with new forecasts for growth and inflation.
- If rates are increased this will be the 14th successive rate hike.
- An increase will also take rates to 15-year highs.
- Consensus forecasts lean towards a 25 basis-point hike with a minority call for 50 basis points.
- Ahead of the decision, markets are pricing in around 30 basis points of tightening.
- This will be the first meeting for new MPC member Greene who has replaced Tenreyro.
- Pound Sterling will slide if there is no rate hike or strong hint over a pause in hikes.
Investment Banks Split on Rate Decision
There are mixed expectations ahead of the announcement with a majority opting for a 25 basis-point rate hike.
A July 19-24 poll by Reuters showed that 42 of 62 economists expect the BoE to raise the Bank Rate by 25 basis points to 5.25%, while 20 predict a half-point rise to match the more aggressive policy move seen at the June meeting.
There are no expectations that rates will be left on hold.
According to Barclays; “This week’s MPC meeting has to balance out a small downside CPI miss in June (following a series of upside surprises) and modest softening in some surveys against much-stronger wage growth than expected, resilient activity and a still-tight labour market.”
It added; “We expect a 50bp hike given the BOE’s recent hawkish pivot and the emergence of second-round effects, but acknowledge this is a close call.”
According to Rabobank; “Our view remains that the BoE aims for a stance slightly more hawkish than the Fed or the ECB, while avoiding any excess hawkishness. Though inflationary pressures persist, signs of slowing economic growth and initial progress on bringing inflation down support scaling back to a 25bp hike.”
Unicredit added; “We expect the Bank of England’s Monetary Policy Committee (MPC) to step down the pace of rate hikes to 25bp on 3 August following recent downside news on inflation and economic activity. The risks are skewed towards a 50bp hike.”
TD Securities notes the risk of a larger hike; “This meeting is a tricky one: incoming data and projections are likely to support a 25bps hike, but the MPC may be tempted to repeat a 50bps hike alongside a dovish lean to speed up their journey to terminal.”
Barclays leans towards a 50 basis-point hike; “We expect a 50bp hike given the BOE’s recent hawkish pivot and the emergence of second-round effects, but acknowledge this is a close call.”
EY ITEM Club considers that the case for a further rate hike is weak; “With better recent news on inflation, leading indicators of price pressures falling significantly, and the Bank of England’s new forecast likely to show inflation heading towards zero over the next few years, the EY ITEM Club thinks the case for another rate rise in August is weak.
Nevertheless it still expects a further rate hike; “But the Monetary Policy Committee (MPC) could still be influenced by past developments, and may feel pressure to be seen to be doing something about still-high inflation. As such, it appears likely that the MPC will increase rates.”
Divided Committee Again Likely
There have been splits on the committee at the last five meetings. In June, Tenreyo and Dhingra again dissented against the decision and voted for no change in rates.
There are expectations that new member Greene is liable to be more hawkish than Tenreyro.
Rabobank expects a 3-way split with 2 members preferring a 50-basis point hike while Dhingra will again dissent against rate hikes with the majority backing a 25 basis-point rate hike.
Barclays added; “Our base case sees an 8-1 vote split for +50bp vs. hold, with external member Dhingra continuing to vote for rates on hold.”
Unicredit takes a similar stance: “We expect the MPC to vote 8-1 to hike the bank rate by 25bp to 5.25%, although we would not be surprised if one or more members voted for a 50bp hike.”
Revised Forecasts in Focus
The BoE will publish revised macro-economic forecasts including updates on GDP expectations.
The forecasts will inevitably be treated with an important degree of scepticism given recent modelling errors.
Higher inflation forecasts would, however, reinforce expectations of further rate hikes.
The bank is likely to forecast that recession will be avoided.
According to Barclays; “we think the upward skew in the existing inflation profile will be realised, which would provide further justification for a second 50bp hike.”
Forward Guidance Watched Closely
The MPC will give some guidance in the statement and the overall tone in the minutes will also give important hints.
Markets will be monitoring any comments on the rate outlook very closely.
It is unlikely that the bank will provide specific guidance, but will probably warn over further action if necessary to control inflation.
According to Danske Bank; “Overall, we expect the BoE to highlight the continued tight labour market and keep the door open for further tightening.”
Goldman expects that there will be a relatively hawkish tone; “we do think that the BoE will be more reticent on the possibility of a pause in comparison to both the Fed and the ECB.”
Barclays still expects a hawkish underlying policy stance given underlying inflation concerns; “Our broader assessment remains that the UK’s inflation problem is a symptom of resilient demand amid tight labour markets and reduced aggregate supply, with broadly resilient sentiment surveys and activity data supporting this interpretation.”
The bank added; “As such, high rates for longer should continue to support sterling via an already considerable carry advantage.”
Unicredit expects the BoE will be wary of overkill; “The BoE has previously said that a bank rate above 5% would pose significant risks to financial stability. Therefore, also for risk management reasons, the MPC would likely prefer to hold rates high for longer rather than to raise them sharply and risk having to backtrack soon afterwards.”
The bank expects the BoE will start rate cuts in the third quarter of 2024 with an end-2024 rate of 4.75%.
Substantial Exchange Rates Reaction Likely
UK rate markets are currently pricing in a round 30 basis-points of tightening and there will a reaction to all policy outcomes.
According to Goldman Sachs, the decision will cause a significant market reaction; “The latest downside inflation surprise and PMI miss raise the possibility of a smaller hike, and with pricing for the August meeting stuck in the mid-30bp region, the decision will force a market adjustment to the very front-end one way or another.”
Dominic Bunning, head of European FX research at HSBC "You've got stretched positioning, valuation looking increasingly rich, both long term and short term, and you've got an economy, which, if anything, is starting to show some signs of softening again."
According to Bunning; "For sterling to push much beyond $1.30, either you'd need a much weaker dollar more broadly or you need some sort of idiosyncratic, absolute strength in the UK. And I don't see that at the moment."
He added; “We look for GBP/USD to weaken and challenge the support at 1.26 over the coming weeks, while any moves above 1.30 are likely to be brief.”
Kallum Pickering, senior economist at Berenberg, is more positive on the outlook; "Political uncertainty, COVID and the war shock are all easing," he said. "And as a result, the supply side of the economy should start to improve."
According to City Index strategist Fiona Cincotta ;"The pound is struggling to book gains amid diminishing expectations that the Bank of England will be able to continue hiking rates aggressively."
Danske Bank's Kundby-Nielsen expect the Pound will struggle; "The market is priced aggressively for further rate hikes from the Bank of England and if that gets dialled down, this will weaken the pound."
He added; "But significant further increases could hurt the economy even more. It's a double-edged sword and I don't really see a best-case scenario for the pound."
According to Socgen; “Prior decisions to raise rates this year have not been well received in general by the Pound. Three of this year’s four rate increases translated into a lower GBP/USD on the day. EUR/GBP rallied on four occasions.”
It added; “Bearish seasonality stands out for the Pound in August with GBP/USD down in eight of the last ten years and EUR/GBP up seven times.”
The bank sees downside risks again at this meeting; “With inflation falling, house prices falling and economic sentiment gloomy, a 25 bps hike with a warning there could yet be more to come, would seem sensible. But given where expectations are that leaves GBP vulnerable this week.”
It added; “25 bps from the Bank, and solid US data, could easily drag GBP/USD back below 1.25.”
According to Danske; “On balance, we continue to see relative rates as a positive for EUR/GBP, which is one of several reasons behind our fundamental predisposition of buying EUR/GBP dips.”