BoE Rate Hike and US Labour Market in Focus 

BoE Raise 25bps

Yesterday, the Bank of England met expectations by raising rates 25bps to bring the benchmark policy rate to 5.25%. Their latest decision marks the 14th consecutive rate hike and brings borrowing rates to fresh 2008 highs. This comes as the central bank continues attempt bringing down inflation which continues to remain well above their 2% target rate, at 7.9%.

Six members of the monetary policy committee voted to raise rates by a quarter of a percentage point, while two members votes opting for a more hawkish 50bps (in line with their last meeting in June). Here, the Monetary Policy Report stated that “some key indicators, notably wage growth, had surprised significantly on the upside. This could indicate that the medium-term equilibrium rate of unemployment had risen, and that some of the risks of greater persistence in broader domestic inflationary pressures had crystallised.” Meanwhile, one member voted to keep rates unchanged, with the MP report citing their view that “the risks of over-tightening had continued to build, increasing the likelihood of output losses and volatility that would require sharper reversals of policy”.

While Bailey suggested that further tightening would likely be needed, there were some dovish undertones to his press conference where the Governor stated that there was “more than one path” to cool inflation. Nevertheless, Bailey also brought some caution to the markets in maintaining that “it was too early to conclude that the economy was at or very close to a significant turning point”. With the benchmark policy rate at 5.25%, markets are considering whether rates will edge close to 5.75%. In characteristic fashion, Bailey stated that “if we get evidence of more persistent inflation then we will have to react to that.” Presently, according to implied money market expectations, there is around a 90% chance of a 25bps hike at Threadneedle Street’s next policy meeting on 21 September.

BoE Inflation Expectations

As markets considered the BoE’s monetary policy moving forward, markets weighed in on the central bank inflation expectations. Here, Threadneedle Street expects inflation to fall to around 6.9% over Q3 2023 and 4.9% by the Q4 2023, (a faster acceleration than had previously been expected). Of course, earlier in the year PM Rishi Sunak promised to bring inflation down by a half to 5.4%. As such, the Bank of England are now indicating that this target may be met, though concerns continue remain over global food inflation given recent events in Ukraine and the Black Sea. On a midterm view, policy makers are also forecasting inflation to fall to 2% by Q2 2025.

On growth, the BoE indicated that while they are no longer forecasting a recession, output will continue to sluggish. Growth in H1 2023 has been seen at around 0.2%, with the BoE seeing a similar rate of growth in the near-term. Such views are of course considerably more optimistic than their assessments last year which pointed to eight consecutive quarters of economic contraction (starting in Q4 2022). As such, now the UK – like many of its counterparts – is expected to ‘softer-than-expected’ landing.