BoE preview: will the central bank make another step towards a rate hike?
At a Glance
The desk anticipates that the Bank of England (BoE) will maintain the Bank Rate at 3.75% during today's meeting, with a possibility of one or two hawkish dissenters. Per the full note source, while recent economic data has not urgently called for rate hikes, the persistent inflationary pressures, particularly in services, suggest that the BoE may signal a future rate increase, potentially as early as June. The market currently prices in a 63% probability of a June hike, indicating room for GBP appreciation should the BoE adopt a hawkish tone. This outlook contrasts with the FTSE 100, which may face downward pressure in such a scenario.
Full Analysis
What the desk is arguing
The desk believes that the BoE's decision to hold rates steady today does not preclude a hawkish shift in tone, particularly given the recent inflation data. Per the full note source, while the latest UK CPI showed a modest rise in headline inflation to 3.3%, core CPI declined slightly, indicating a mixed inflationary landscape. However, the persistent rise in Services CPI to 4.5% underscores the risk of entrenched inflation, which could compel the BoE to tighten policy sooner than expected.
Moreover, the S&P Global PMIs indicate a concerning trend, with businesses reporting the steepest rise in cost burdens in over three years, driven by energy price shocks and wage pressures. This suggests that inflationary pressures are not merely transitory, reinforcing the desk's view that the BoE may need to act decisively to maintain its inflation targets.
Where it sits in our coverage
Our consensus target for GBP/USD is 1.075, with a range from 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - goldmansachs: 1.12 (Mar26)
This perspective aligns with jpmorgan's view but diverges from bofa, which holds a more cautious stance. The desk's outlook is positioned at the upper end of the consensus range, reflecting a more optimistic view on GBP appreciation.
How other firms see it
Firms like jpmorgan and goldmansachs share a similar bullish outlook on GBP, anticipating potential rate hikes that could strengthen the currency. Conversely, bofa remains skeptical, suggesting a more dovish approach from the BoE in the near term.
Traders should also monitor the EUR/GBP exchange rate, as shifts in BoE policy could create ripple effects across the currency pair. Additionally, the trajectory of UK inflation data will be critical in shaping market expectations for future BoE actions.
What the calendar says
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From the original
The Bank of England is expected to keep the Bank Rate unchanged at 3.75% today with one or two hawkish dissenters. At the last meeting, the BoE delivered a hawkish hold with unanimous decision to leave rates unchanged and the removal of the easing bias. Moreover, in the minutes,
Related speeches
4 itemsECB preview: a hawkish hold is expected but there's risk of a disappointment
The European Central Bank (ECB) is poised to maintain its policy rate at 2.00% amid a backdrop of rising inflation and mixed economic signals, suggesting a cautious approach moving forward. Per the full note [source], the ECB's forward guidance is expected to remain non-committal, emphasizing a data-dependent stance. Market participants are particularly focused on the press conference for insights into the ECB's reaction function, especially given the recent increase in headline inflation driven by energy prices. The market is currently pricing in 80 basis points of tightening by year-end, with a high probability of a June rate hike, which may lead to disappointment if the ECB adopts a less hawkish tone than anticipated.
BOE leaves bank rate unchanged at 3.75% in April meeting, as expected
The desk interprets the Bank of England's decision to maintain the bank rate at 3.75% as a prudent response to current economic conditions, particularly given the uncertainty surrounding energy prices and geopolitical tensions. Per the full note [source], the BOE's cautious stance reflects a desire to monitor inflation developments before committing to further rate hikes, with current market pricing indicating a reduced likelihood of immediate increases. This aligns with our broader view of a cautious central bank amid a weakening economy, as evidenced by the shift in market expectations for rate hikes, now pegged at around 50% for June and 61 bps for the year-end. The upcoming economic data will be critical in shaping future monetary policy decisions.
Dreadful UK jobs report questions need for rate hikes
The latest UK jobs report has raised significant doubts about the necessity for further interest rate hikes from the Bank of England (BoE). According to ING Economics, the dismal performance in the UK's labor market calls into question the central bank's hawkish stance as inflationary pressures show signs of easing. Per the full note, the rising unemployment rate, which increased to 4.3% in the three months leading to December, alongside disappointing wage growth, further complicates the BoE's policy outlook. This softer data comes amid a broader narrative where traders have positioned themselves for a potential pause in rate hikes, deviating from previously held expectations. With no immediate catalysts ahead, market participants are poised to reassess their strategies in light of this latest labor market data.
Benign UK inflation data reduces chance of June rate hike
Given the latest inflation report from the UK, the probability of a rate hike by the Bank of England this June appears to have diminished. Per the full note from ING Economics, UK inflation figures released recently were more benign than anticipated, consequently lowering expectations for immediate monetary tightening. This shift suggests further scrutiny around the BoE's timeline for rate adjustments as markets recalibrate their forecasts in response to the surprising data. With the upcoming lack of high-impact events in the calendar, traders will closely track how this influences GBP positioning and sentiment in the near term.
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