A preview of the BoE meeting and the Inflation Report due next week (Thursday); this via RBC Capital markets

Their main points summary:

UK: A once in a decade hike...but what next?

MPC and Inflation Report preview

  • A 25bp Bank Rate hike with a 7-2 vote by the MPC is expected on 2 November. RBC forecasts no further tightening in 2018.
  • The November Inflation Report projections should show CPI inflation at or very close to 2% at the 2-3yr horizon as it will be underpinned by a profile for interest rates with more near-term policy tightening.
  • The BoE forecasts are likely to imply that around two more 25bp rate hikes will be appropriate over a 2-3yr horizon. With the MPC's 'gradual and limited' mantra on rate hikes means that expectations for a follow-up move early in 2018 should be opposed.

And, more (the report is long and detailed ... this just a few snippets that I thought i'd highlight):

The MPC are likely to signal another two 25bp hikes in the forecast horizon

  • policy signal ... that a Bank Rate of around 1% 2-3yrs from now should be roughly sufficient to meet the inflation target
  • This would require just two further 25bp rate hikes, following a move in November
  • In our view, this would be inconsistent with the market pricing in the next hike as soon as February 2018
  • The amount of tightening the MPC needs to do by its own estimates is moderate and it has repeatedly pushed the mantra that when rates go up, moves will be 'gradual and limited'.

A November hike is almost fully discounted

the probability of a 25bp rate hike at the upcoming meeting has remained largely unchanged at 80% for most of October, until after the ahead-of-consensus Q3 GDP data. The OIS curve is now implying almost 90% chance of a 25bp rate hike for the November MPC meeting

  • The market is ... currently implying that following a rate hike in November (most likely), there is c. 45% probability of another 25bp rate hike at the February meeting next year.
  • A c.50% probability of another hike within three months looks particularly high given that there is already likely to be a disagreement within the committee next week (we expect a 7-2 split in favour of a rate hike, but a 6-3 split is quite conceivable as well).


I posted this earlier from Morgan Stanley:

  • Preliminary 3Q GDP is a key data release.
  • Anything weaker than 0.3%Q (our forecast and also the figure expected by the BoE at the time of the BoE's August Inflation Report) would lower the probability of a rate rise in November, by looking consistent with increasing rather than stable or shrinking spare capacity.

That data point is out, at a beat: UK Q3 GDP first reading qq 0.4% vs 0.3% exp

At 0.4%, it supports the MS view of the likelihood of a rate hike by the BoE on November 2

Note, though, Mike (our man in the UK) remains unconvinced:

  • I'm ready to concede that, if only for a bit of wiggle room to lower again as I have long highlighted, Carney & Co may now have the face-saving ammo/excuse they need to raise by 0.25% although I still wouldn't be surprised to see them hold again.

Mike's post is here for more.