Bank of England set for first rate hike as energy shock worsens
At a Glance
The Bank of England is poised for its first rate hike, expected to incrementally raise rates by 25 basis points to 4%, driven by mounting inflationary pressures from rising energy costs. Per the full note from ING, a 7-2 vote is anticipated, and further moves could follow in February given the substantial rise in energy prices. This evolving scenario places pressure on the Bank to adapt its trajectory away from its previous stance of 'active hold.' The market response has been mixed, indicating pricing challenges ahead as traders recalibrate expectations in light of potential inflation peaks above 4% in early 2024, with the next monetary policy review coming on November 5th.
Key Takeaways
- 01The Bank of England is expected to raise rates by 25 basis points to 4% amidst rising inflation pressures.
- 02A 7-2 vote signals a strong consensus for the rate hike, with potential for further action in February.
- 03Energy prices are forecasted to peak inflation above 4%, altering market pricing for GBP.
- 04The upcoming monetary policy meeting on November 5th will be a critical event to watch for clarity on future hikes.
Full Analysis
What the desk is arguing
The desk argues that the Bank of England's imminent rate hike is a necessary response to severe inflationary threats stemming from escalating energy costs. With inflation predicted to surpass 4% shortly, this marks a significant pivot from the prior policy stance. Per the full note from ING, the Bank's struggle to maintain its position amidst the energy crisis foreshadows a shift in monetary policy strategy.
Supporting this narrative is the anticipated 25 basis point hike, driven largely by a projected spike in natural gas prices and an anticipated increase in household energy bills by about 25% in January. Historically, the Bank has refrained from hiking rates; however, the energy crisis prompts a change in strategy akin to that of the European Central Bank, which has sought to counter inflation through rate increases.
Where it sits in our coverage
Current consensus targets for EUR/GBP see levels around 1.075, with projections varying from 1.04 to 1.12. Notably among firms: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk’s stance aligns closely with jpmorgan at the higher end of these estimates, indicating a stronger stance on EUR/GBP compared to bofa, which holds a more conservative view.
How other firms see it
A number of firms, including jpmorgan and citi, share a similar outlook on a hawkish Bank of England, suggesting the anticipated rate movements align with rising inflation expectations. In contrast, bofa and other firms express skepticism regarding the sustainability of such moves amid potential economic headwinds.
Moreover, the anticipated impact of the Bank of England's policies may reverberate through related pairs like GBP/USD and EUR/USD, particularly in expectation of broader shifts in central bank policies across Europe and the US.
Market Implications
Traders should monitor the 1.075 level in EUR/GBP closely, as this rate hike could reinforce bullish sentiment. Any surprises or confirmations from the November 5th meeting could intensify movement, particularly with inflation data slated to emerge in early 2024.
From the original
Articles Bank of England set for first rate hike as energy shock worsens Published 08:29 FX Rates United Kingdom Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download We expect a 7-2 vote to hike rates this week and, barring a collapse in energy prices, we
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