What To Expect From The BoE Meeting Tomorrow?

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Up until quite recently, there was a pretty solid consensus that the BOE would follow through on another 25 basis point rate hike at this meeting. But that was thrown into a bit of disarray after the higher-than-expected inflation from the US. Since that re-evaluated the rate trajectory of the Fed and the threat of global economic contagion, analysts started re-evaluating their expectations for the BOE.

Since then, weakness in the pound has largely been attributed to strength in the dollar, as markets anticipate stronger rate hikes from the Fed. Should that happen, US interest rates could overtake the UK and put cable under even more pressure. With the ECB also looking to hike, the UK's main trading partners could soon have a tighter rate policy in comparison. That could put additional pressure on the BOE to raise rates.


The trajectory to follow

At the last BoE meeting, 3 members out of the 9 dissented, calling for a 50 basis point hike. Meaning that there is already a substantial amount of support already for raising rates faster. It's just a matter of getting another two members on board.

On the flip side, the UK GDP has come in negative for the last couple of months. That could spook the MPC, trying to thread the needle with getting inflation under control, but not going so far as to hurt the economy. The UK does have higher inflation than its major peers, which suggests more urgency to address the rising living-costs problem, before that, too, causes a recession.


Time for a change?

Since March, the BOE has forecast that inflation would continue to rise through June – meaning that higher inflation might not be desirable, but it certainly fits within the BOE's projections and those of the government. The latter has also just recently announced a package of measures that would increase spending. Potentially, this could help support the economy but would not achieve much in terms of helping tackle inflation. 

Even though the outlook has substantially shifted for the markets in the last few days, that doesn't mean the situation for the BOE has shifted. Particularly if the Fed doesn't deliver on a faster rate hike later today. In fact, some analysts suggest that if the Fed opts for another 50bps instead of 75bps, it could all but guarantee a 25bps hike with a minority dissension at the BOE meeting tomorrow.


What to look out for

How the markets will react to the BOE might have more to do with the vote. A 25bps hike with 4 dissenters could be interpreted as a very high likelihood of a 50bps hike at the next meeting. That would likely be interpreted as hawkish. A 25bps hike with 2 or fewer dissenters could be interpreted as dovish, and further, weaken the pound.

If the BOE does deliver on a 50bps hike, then traders are going to be really curious about what Bailey states after the fact. Specifically, investors will be looking out for clues on whether another rate hike will still be on the cards at the central bank's July meeting.

Disclaimer: Orbex LIMITED is a fully licensed and Regulated Cyprus Investment Firm (CIF) governed and supervised by the Cyprus Securities and Exchange Commission (CySEC) (License Number 124/10). ...

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