Are the BoE Nearly Done Hiking?

Written on 01/08/2023 by Lukman Otunuga, Senior Research Analyst at FXTM

Bank of England’s “Super Thursday” and Potential Policy Hike

It’s the Bank of England’s turn next to reveal their latest policy hand on Thursday, hot on the heels of the Fed and the ECB. Those two major central banks recently dropped guidance that borrowing costs would keep rising, hinting that their July rate hike could be the last. Will the Old Lady follow suit and hike by 25bps while adopting a more neutral bias to assess the 500bps of policy tightening already heaped on the economy?

Disinflation has been the key theme in markets recently and this has finally been seen in the UK after months of sticky and elevated price pressures. The recent pullback in inflation is a strong reason for expecting a smaller 25pb rate hike at this meeting after the half-point move in June. Otherwise, economic releases have generally been mixed since the MPC’s last gathering. PMIs surprised to the downside and point to weakening growth in the months ahead. While still-high services inflation declined in June, wage inflation remains elevated and large public sector wage agreements pose potential second round effects.

Governor Bailey will be armed with a fresh Monetary Policy Report making it’s a “Super Thursday”, but there shouldn’t be too much difference with the prior projections. For some time, the Bank’s models have predicted forecast inflation below target in two years’ time and rate expectations have gone higher since May. That means Bailey could simply reiterate that future hikes will happen if “persistent” inflation continues.

Sterling’s Recovery and the Pound’s Dependence on Policy Decisions

Sterling is trying to recover its losses which hit the currency after the recent softer inflation numbers. That also knocked the pricing of the peak BoE rate down below 6%. Only a half-point rate hike will really boost the pound, though that might be short-lived if the MPC and Governor Bailey downplay the need for much more policy tightening. A data dependent mantra could also see GBP struggle to reassert itself as the best performing major currency this year.

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