Bank of England policy makers will decide on Thursday whether to call a halt to a string of 14 consecutive interest-rate increases, with investors and handful of economists raising doubts about another hike.
(Bloomberg) — Bank of England policy makers will decide on Thursday whether to call a halt to a string of 14 consecutive interest-rate increases, with investors and handful of economists raising doubts about another hike.
Investors have still fully priced in one more quarter-point increase this year in the UK central bank’s base rate, which is now 5.25%. But a drop in inflation to an 18-month low announced Wednesday raised questions over whether the BOE will deliver that hike today.
Markets are now braced for a 50% chance of no change in rates — which would be the first lull in a monetary tightening that started at the end of 2021. Prominent economists at Goldman Sachs and Nomura also have reversed calls for a hike, upending near unanimity for an increase in a survey completed earlier this week.
A pause would follow the example of the US Federal Reserve, which on Wednesday kept its base rate steady at a 22-year high. More likely, according to economists, is a “dovish hike” in the same vein as the European Central Bank, which last week bumped up its base rate while hinting it had reached its peak.
Either way, debate in the UK is shifting away from inflation fear to and toward how much the quickest increase in borrowing costs in three decades is damaging the economy. With the outlook dimming rapidly since the start of the second half of the year, investors are looking both at the rate decision and forward guidance from the BOE.
The decision will be announced at 12 p.m. in London. Here’s what to expect:
Governor Andrew Bailey and his colleagues on the nine-member Monetary Policy Committee will release minutes of their decision but don’t plan a press conference or new forecasts. Instead, they’ll signal their intentions through forward guidance in minutes of the meeting.
The rates decision will capture exactly how the MPC is reading recent data on the labor market and inflation — and how urgently they think the BOE should act to return inflation to target. Investors will look carefully at guidance toward the end of the minutes for clues about future moves.
BOE’s Guidance on Aug. 3
“The MPC would continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including the tightness of labor market conditions and the behaviour of wage growth and services price inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.”
Economists and some BOE officials have expressed concern that the economy is rapidly slowing and may tip into recession under the weight of the highest interest rates since 2008. Others think a pause in the tightening could be declaring victory over inflation too soon.
“It is too early for the Bank of England to be sufficiently confident that the current level of interest rates – even if held for a longer time – will be enough to return inflation to target,” said Kim Crawford, global rates portfolio manager at JPMorgan Asset Management.
What Bloomberg Economics Says …
“The shock decline in CPI inflation in August has thrown up a cloud of uncertainty around the Bank of England’s September decision. On balance, we still think soaring pay growth will seal the deal on another rate rise and that the central bank will shy away from making tweaks to its guidance in order to guard against any loosening of financial conditions. But the risks to our view are all in one direction. There is now a real possibility the BOE pauses its hiking cycle this month or, perhaps more likely, raises rates while sending a signal that it thinks the move will be the last of the cycle.”
—Dan Hanson and Ana Andrade, Bloomberg Economics. Click for the INSIGHT.
Such is the uncertainty that sterling and UK bonds are set for volatility whichever way the decision goes. Bets on higher rates made the pound the among the best performing currencies in the first half of the year, but the UK currency has weakened in the second half as the economy sputtered.
“Perhaps surprisingly given a negative outlook on growth and concerns about inflation, we believe downside risk to GBP and UK assets in general will not be as big as for eurozone equivalents,” said Geoff Yu, forex and macro strategist for EMEA at BNY Mellon, who anticipates a quarter-point hike.
Earlier this week, a Bloomberg survey showed almost all economists expected a rate hike Thursday. The average was for eight MPC members to vote for a 25-basis-point hike and Swati Dhingra to dissent in favor of no change. After Wednesday’s inflation print, Dhingra — the MPC’s most dovish member — might find herself with more company.
Combined with the BOE’s forward guidance, the vote split might give some hint as to which direction rates are headed in. However this will be the last MPC appearance for Deputy Governor Jon Cunliffe, who is set to be replaced as by Sarah Breeden at November’s meeting.
Read more: Bird-Watching Helps Discern the Bank of England’s Next Move
Policy makers also will hand down a decision on the pace of asset sales from the BOE’s quantitative easing portfolio.
The BOE bought as much as £895 billion ($1.1 trillion) of government and corporate bonds under the QE program and is now trimmed that back to £760 billion through quantitative tightening. Over the last year, it’s divested about £80 billion of assets, and James Smith, at ING, anticipates that pace may increase to £100 billion for the 12 months starting in October.
Sales crystallize losses on the bonds, which the Treasury has agreed to pay for. Over the entire lifetime of QE, it may cost taxpayers £150 billion.
“It seems a little bit premature to accelerate tightening,” Yael Selfin, KPMG UK’s chief economist, said in an interview on Bloomberg TV. “I don’t see the need to do that. We’re very far from the zero lower bound and there’s quite a lot room to potentially cut rates if needed. They could probably keep the pace as it was before rather than accelerate it, especially when you think about the costs to the Treasury.”
–With assistance from Eamon Akil Farhat and Lizzy Burden.
(Updates with comment in final paragraph.)
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