Central bank meetings come thick and fast this week with the Bank of England set to deliver their rate decision on Thursday. They are likely to step back from the rate cutting brigade and there is only a slim chance (27%) of another 25pbs rate reduction as the Old Lady treads more carefully than the Fed and the ECB. Services inflation and wage growth in the UK remain elevated and sticky. That is probably a concern for enough MPC officials to want to assess the incoming data before triggering more policy easing. There are no new forecasts or a press conference at this meeting.
Unlike other central banks, the Bank of England and MPC keep a fairly tight ship with regards to commentary and intra-meeting policy guidance. Governor Andrew Bailey used his speech at Jackson Hole recently to set out three scenarios for “persistent” inflation, ranging from the benign (where services inflation falls of its own accord, regardless of what the BoE does), to one where it turns out price/wage setting behaviour has permanently shifted in a way that forces rates to stay high for longer. That simply reflects the increasingly visibly divided committee on where rates need to go next.
Vote and recent data
The August rate cut was a very close-run decision with a rare 5-4 split, but this time it is expected to be 7-2 in favour of holding rates, with rate cutters Dhingra and Ramsden in the minority. Any more dovish officials would no doubt be a surprise and hit sterling.
As for the economy, the relative ‘UK exceptionalism’ seen in recent months has come under pressure with softer than expected GDP data. However, it is price pressures which the MPC monitor most closely. Today’s 5.6% print in service inflation is marginally below the bank’s current forecast. But it is still above the US and eurozone’s equivalent figures while wages and other job market figures aren’t calling for more policy easing.
Market reaction
GBP has outperformed all of its major peers this year with sterling up over 3.5% versus the dollar. Only the euro of the other major currencies is in positive territory. The more stable political landscape may be one reason, stagnation in the euro region is also valid and rate differentials have certainly played a part. It is the latter which aren’t likely to change that much unless the BoE surprise markets with a more dovish stance. A no-rush tone by the MPC could further support GBP. Decent support in cable sits at 1.3037 with recent highs and resistance around 1.3261/66. Money markets are currently pricing in around 45bps of rate cuts by year end. A quarter point November cut is fully priced with an 80% chance of another in December.