BOE Rate Decision: A Likely Hold Before the Data

The BOE is widely expected to keep rates on hold at its Thursday meeting, which will be a key BOE Rate Decision. But one major caveat is that inflation data coming out on Wednesday is at least near expectations. Several aspects of the rate decision could move the markets, and they are all sensitive to what the inflation rate says.

The UK is on a path to higher interest rates than its peers, thanks to faster economic growth and larger wage increases. Investors are largely expecting that pattern to be matched in the data and the BOE Rate Decision.. That would likely keep the pound generally stronger than its main trading partners. But if something were to disrupt those expectations, it could lead to a magnified drop in cable.

Handling the Expectations

According to Reuters’ pre-rate decision survey of economists, the BOE will keep rates on hold on Thursday, and will cut rates in the November meeting. Market futures are pricing in a similar pattern, with a slight favoritism towards two rate cuts for the remainder of the year. This supposes that services inflation will keep staying relatively high, as UK wages rise at a rate that is significantly above the inflation level.

BOE Governor Andrew Bailey addressed this situation already, with particularly pointed remarks at the Jackson Hole Symposium back in August. There, he said that inflation pressure remained, and therefore rates would have to be high for a while. The path downward would be gradual, barring any unforeseen events. The market would likely expect a reiteration of this kind of rhetoric in the wake of the next meeting.

What the Data Says

The markets appear to be pricing in the prediction from the BOE that inflation will likely have a slight rebound in the latter half of the year. Nevertheless, for August, the rate is expected to tick down slightly on the headline thanks to lower energy prices. The core rate, which is more relevant to tracking what the BOE will do, is expected to rise slightly. A beat over expectations could get the market to price out the minority chance of two rate cuts for the remainder of the year, and raise the pound.

Headline UK inflation for August is expected at 2.1%, down from 2.2% prior. This is thanks to base effects, as the higher rate of July last year rolls off. The monthly rate is expected to come back out of deflation at 0.1% compared to -0.2%. Meanwhile, the core rate is expected to tick up to 3.4% from 3.3%. A miss on this point, particularly showing that core inflation has surprisingly gone down, could get the market to start predicting more rate cuts this year and weaken the pound.

How the Market Will React to the Rate Decision

As usual, the markets are likely to first look at the vote split to determine the inclination of the central bank. At least one member is expected to dissent and vote for a cut. A more even split, like 5-4 in favor of holding, could get the market convinced that November is once again cutting time, and weaken the pound marginally.

Then it’s the turn of Governor Bailey’s press conference, in which markets will be hoping to see some confirmation of lower rates at the next meeting. Merely keeping to his “data dependent” and rates needing to stay restrictive for a while will likely satisfy markets in their projections.

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