The Bank of England’s Hawkish Surprise


The Bank of England (BOE) is poised to follow suit with other central banks by increasing interest rates by a quarter-point this week. However, despite these efforts to curb inflation, the task at hand is far from over, and investors should prepare for a potentially hawkish surprise.

In contrast to the Federal Reserve and the European Central Bank, which recently raised rates by 25 basis points and indicated nearing the end of their efforts, the BOE remains the outlier. It recognizes that its work is data-dependent and acknowledges the ongoing challenge posed by inflation.

Although there are signs of a slowdown in price growth, the UK continues to grapple with high levels of inflation. The pressure on wages exacerbates this issue, potentially compelling Governor Andrew Bailey and the BOE’s Monetary Policy Committee to adopt a more stringent stance in their upcoming announcement.

Analyst Charalampos Pissouros from broker XM highlights the distinct position of the BOE compared to its counterparts, stating, “With most major central banks already seen ending or approaching the end of their tightening campaigns, the only one standing out is the Bank of England.”

Among the Group of Seven (G7) countries, the UK has faced the most severe inflation. However, recent data indicates a promising moderation of the consumer price index (CPI) in June. As a result, it is unlikely that the BOE’s 14th consecutive rate hike will be an unexpected 50-basis point increase.

In summary, while the Bank of England may be aligning with other central banks in raising interest rates, its unique challenges with inflation and wage pressures suggest that it may deviate from expectations and deliver a more hawkish approach.

Inflation Slows Down, Easing Pressure for Rate Hike

The recent inflation data for June has shown a surprising slowdown, coming in at 7.9% instead of the expected rate. This development has led analysts to believe that the pressure on the central bank to raise interest rates by another 50 basis points has decreased. Michael Hewson, an analyst at broker XM, suggests that this could be a positive sign for the Bank of England.

Challenges Remain for the Bank of England

Despite the news of lower inflation, there is a concern regarding wage growth. Wage growth has surpassed the core Consumer Price Index (CPI), posing a challenge for the Monetary Policy Committee (MPC) in determining their next course of action. This could potentially shift the committee towards a more hawkish stance and prompt them to consider raising rates by 50 basis points.

The Importance of Quarterly Forecasts

In addition to the regular rate decision, monetary policy statement, and meeting minutes, the Bank of England will be releasing a set of quarterly forecasts on Thursday. These forecasts will cover inflation and economic growth, and they are expected to receive close attention from investors. Jamie Dutta, an analyst at broker Vantage, suggests that these projections may not differ significantly from prior ones. The Bank’s models have consistently predicted inflation below target in two years’ time, and rate expectations have been increasing since May. This implies that Governor Andrew Bailey may reiterate the possibility of future rate hikes if inflation remains “persistent.”

Final Thoughts

The impact of inflation and wage growth on monetary policy decisions remains a key focus for the Bank of England. The unexpected slowdown in inflation may alleviate some pressure for an immediate rate hike, but challenges persist. Investors will eagerly await the release of the quarterly forecasts to gain further insights into the Bank’s outlook on inflation and economic growth.

Alongside the usual rate decision, monetary policy statement, and meeting minutes, the BOE will also release on Thursday a package of quarterly forecasts covering inflation and economic growth that will be closely watched by investors.

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