- We expect the Bank of England (BoE) to hike the Bank Rate by 25bp to 0.50% from 0.25% with a vote count of 7-2.
- We think this is more about taking back the emergency cut from August 2016, just after the Brexit vote, and not the beginning of a new hiking cycle for now.
- We expect the BoE to repeat that it will hike at only ‘a gradual pace and to a limited extent’.
- The direction for EUR/GBP from here will crucially depend on whether the BoE signals that the November hike is a one-off or not
Not the beginning of a new hiking cycle for now
After the surprisingly hawkish shift in tone at the latest Bank of England (BoE) meeting in September, we think the BoE is going to hike the Bank Rate by 25bp from 0.25% to 0.50% at its meeting on Thursday (in line with consensus and market pricing). The shift is due to a combination of low unemployment rate and high inflation. We think the vote count is likely to be 7-2, as Sir David Ramsden and Sir Jonathan Cunliffe have indicated that they think it is too early to hike. However, even Gertjan Vlieghe, who was previously considered very dovish, now seems to support a hike and we think most BoE members are inclined to vote with the majority.
As we believe the hike is relatively certain, the bigger question is whether this is the beginning of a new hiking cycle or not. We are in the camp believing this is more about taking back the emergency cut from August last year just after the Brexit vote and do not forecast another rate hike in 2018. In this regard, it is worth noting what the BoE says about the current market pricing of BoE, as the BoE has a tendency to compare the current market pricing to the consensus view among BoE members. This is going to be very important for whether or not this is just a ‘one and done hike’, as markets have priced in a second hike by autumn 2018, which we think is too hawkish. If we are right, the BoE may say that markets are overestimating the number of rate hikes, although the BoE may try to keep its flexibility here. Regardless, we expect the BoE to repeat that it will hike at only ‘a gradual pace and to a limited extent’.
There are multiple reasons why we do not believe this is the beginning of a new cycle despite the current situation with low unemployment and high inflation: we still believe the BoE is too optimistic on the growth outlook, as it projects a pickup in private consumption growth due to higher wage growth, which we are having a hard time seeing in the current situation. The still subdued wage growth also means that domestically generated inflation is not as high as actual inflation, which is pushed higher temporarily by the big fall in GBP, which again passes through to consumer prices only slowly. By the end of the day, it is the underlying inflation pressure that is important for the BoE. Finally, but not least, the ECB is not expected to hike before 2019 and has just extended QE by nine months (although slowing the buying pace) and we do not believe the BoE wants to tighten monetary policy too much relative to the ECB
This is one of the big meetings, so we will also get updated projections and a press conference. We expect inflation to be revised higher in the short-term but to be unchanged further out on the forecast horizon. Although GDP growth is weaker now than previously, we think the BoE will continue signalling a pickup in GDP growth due to higher wage growth. The unemployment rate has continued to turn out lower than expected and hence we expect another downward revision of the projections.
EUR/GBP: downside risks if BoE hesitant that hike is a one-off
The direction for EUR/GBP from here will crucially depend on whether BoE signals that the November hike is a one-off. With the market priced some 90% for the hike, this should in itself deliver only limited GBP strength but a knee-jerk reaction in EUR/GBP to test the 0.88 level could be on the cards. If the BoE manages to convince the market that the hike is a one-off, then the cross should stick to the 0.87- 0.90 range but we emphasise that there is a significant risk the BoE will fail to conjure up speculation on further nearterm tightening. Coupled with negative EUR momentum post the ECB’s dovish tapering, this heightens the risk of a move below 0.88 on the announcement. However, we still target this level (0.88) in 1-3M, as we think the BoE will be keen to stress its data and Brexit dependence, which we deem limits the scope for further policy tightening on a 12M horizon. We still expect EUR/GBP to edge only a little lower on a six to 12M horizon
