- In line with our expectation, the BoE today hiked the policy rate by 25bp, bringing the Bank Rate to 5.25%.
- We stick to our call of a final 25bp hike in September marking a peak in the Bank Rate of 5.50%. Wage growth and service inflation remain the key releases to follow.
- We stay negative on GBP and continue to see relative rates as a positive for EUR/GBP from here.
The Bank of England (BoE) hiked the Bank Rate (key policy rate) by 25bp to 5.25% with 6 members voting for a 25bp hike, two members for 50bp and one member voting for keeping the Bank Rate unchanged.
The majority of the Monetary Policy Committee (MPC) voted for an increase of 25bp to “address the risk from greater inflation persistence” although they noted that previous increases in monetary policy are weighing on economic activity. The BoE retained its forward guidance repeating that “if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required” and struck a cautious note by stating that while recent data it was too early to conclude that the economy was “at or close to a turning point”. Although the BoE both in the statement and later at the press conference repeatedly referred to the upside risks to inflation and in particular developments in wage growth, the BoE added that “the current monetary policy stance is restrictive” and that the MPC “will ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with its remit.” This could possibly indicate that the BoE is priming markets for an impending pause.
While the labour market has started to show signs of loosening and June inflation surprised to the downside, we do not believe that data will have weakened enough for the BoE to pause at the September meeting. Before the next meeting on 21 September, we get both two job market reports and inflation data for July and August. As the key concern for the BoE remains developments in wage data as well as service inflation these are the key data releases to follow.
Rates. Overall, the reaction in rates markets was relatively muted. Initially, rates markets rallied on the decision and statement and sent 2Y Gilt yields lower, but largely retraced the move during the afternoon. Markets are pricing in 22bp for the September meeting and a peak in the Bank Rate of 5.80%.
FX. As expected, EUR/GBP initially moved higher but partly retraced the move the following hours. On balance, we continue to see relative rates as a positive for EUR/GBP from here, which is one of several reasons behind our fundamental predisposition of buying EUR/GBP dips. We still like our short GBP/CHF trade recommendation.
Our call. We continue to expect a 25bp at the September meeting and this to mark the final hike in this is hiking cycle and a peak in the Bank Rate of 5.50%. In order for BoE to opt for an unchanged decision instead of 25bp we believe that we would have to see data releases, most notably wage growth, prove considerably worse than what we currently pencil in. Our call is less than current market pricing (55bp until February 2024). We still believe that the first rate cuts will not be delivered before Q2 24.
 hiked the Bank Rate (key policy rate) by 25bp to 5.25% with 6 members voting for a 25bp hike, two members for 50bp and one member voting for keeping the Bank Rate unchanged.){kind=link}