Will the Bank of England hike interest rates today?

imageEconomy20 hours ago (Nov 04, 2021 09:27)

© Reuters

By Samuel Indyk

Investing.com – Thursday’s Bank of England interest rate decision is likely to be one for the history books with traders and economists split on what the central bank might do.

Markets have priced in an interest rate hike following recent commentary from officials on the Monetary Policy Committee, however, analysts and economists surveyed by Reuters are less sure.

Of the 59 surveyed economists, 47 expect the Bank of England to keep the interest rate unchanged at 0.10%, 11 expect a hike of 15 basis points to 0.25% and 1 expects a 25 basis point hike to 0.35%.

The CME’s BoEWatch tool shows markets are pricing in a 100% chance of a rate hike today. The tool uses MPC SONIA futures prices to gauge market expectations of the future course of BoE monetary policy.

Why the split?

The ‘Will they/Won’t they’ scenario has arisen following a surge in inflation in the UK with CPI above the BoE’s target of 2.0%. CPI has been at or above the target since May and expectations are that it will continue pushing higher in the coming months amid a surge in energy prices and supply chain bottlenecks.

Although the Bank of England Governor Andrew Bailey has repeatedly said the spike in inflation is expected to be temporary, he also signalled that the Monetary Policy Committee (MPC) would have to act if they see a risk to medium-term inflation and to medium-term inflation expectations.

The comments, from a speech on 17th October, were the clearest signal yet that the central bank was considering hiking the interest rate as soon as today’s meeting.

Other MPC members likely in favour of an interest rate hike include Dave Ramsden and Michael Saunders, who both voted to end asset purchases early at the last meeting.

Huw Pill, the new Chief Economist at the BoE, warned last month that inflation could exceed 5%, adding that November’s decision is ‘live’, suggesting that he might also favour a rate hike this month.

At the other end of the hawk/dove spectrum lie Catherine Mann and Silvana Tenreyro. Mann, who is sitting on only her second meeting, previously signalled it might be prudent to wait before hiking rates. Tenreyro has said that lifting interest rates could be “self-defeating” if inflationary pressures were temporary.

So that leaves Deputy Governor’s Ben Broadbent and Jon Cunliffe, and external member Jon Haskell as the potential key decision-makers when the central bank announces its decision at 12:00GMT. The three members of the MPC have not shared their views on the inflation picture and outlook for interest rates in recent weeks, however, if Bailey, Pill, Ramsden, and Saunders vote for a hike, they would only require one more vote to lift interest rates.

Credibility issue?

There is an argument among analysts that if the Bank of England did not lift its interest rate on Thursday that they could face credibility issues. Bailey will want to avoid receiving a moniker akin to his predecessor where market participants referred to the previous Governor, Mark Carney, as the ‘unreliable boyfriend’.

Many, therefore, think the most suitable outcome today is for the BoE to lift its interest rate but provide a signal that they will be flexible and maybe temper expectations for further rate hikes.

“The best bet for the BoE would be to hike by 15 basis points but push back on aggressive pricing for 2022,” said Newsquawk Senior Market Analyst Adam Linton.

Markets are currently pricing in at least 100 basis points of tightening by this time next year.

Market Reaction

Analysts at Danske Bank see a case for EUR/GBP moving higher near-term in response to either unchanged policy or a dovish rate hike, given the aggressive market pricing. However, they think any potential move could be short-lived, given that rate hikes would still be expected from the BoE while the ECB is expected to stay patient.

“We still believe the environment is more supportive for GBP than EUR, as GBP usually strengthens in an environment where USD does,” Danske Bank analysts said in a research note. “That said, the potential for a stronger GBP is lower than for USD. We still target EUR/GBP in 0.83 12 months.”

Will the Bank of England hike interest rates today?


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