Bank of England: Hawkish hold risks and November hike – MUFG

MUFG’s Henry Cook expects the Bank of England to deliver a hawkish hold, with UK inflation driven higher by energy and headline CPI projected to exceed 4% after the January price cap reset. The report highlights a soft labour market and limited domestic price pressures, but still anticipates 50bp of BoE tightening starting in November, contingent on energy prices.

BoE weighs hawkish hold and hikes

"Against that background we expect the BoE will deliver a fairly hawkish hold at tomorrow’s meeting and provide a signal that a rate hike in November is on the cards if energy pricing remains elevated. We have pencilled in a 6-3 vote again, but a 5-4 split would be no surprise, with Lombardelli being the most likely to join the dissenters. For now, a majority on the MPC is likely to believe that a ‘wait-and-see’ approach is still tenable."

"That position looks increasingly shaky given energy market developments, and we expect the case for pre-emptive tightening on a risk management basis will gain traction. Our base case is for 50bp of hikes starting in November."

"In terms of our call, we now see 50bp of BoE tightening. Pill argued that some tightening would manage upside risks to inflation and “need not be the start of a prolonged and aggressive series of increases”. Indeed, current market pricing for 100bp of hikes looks overdone to our minds given the soft labour market and lack of any broadening price pressures."

"On timing, if the threshold for pre-emptive tightening is deemed to have been reached by November, then a back-to-back move in December would certainly be plausible. That would tally with our current view on the ECB path. However, unlike the ECB, the BoE already has rates in restrictive territory – just about – and the UK labour market is soft."