UK Inflation And BOE Rate Hike

Analysts have speculated for a long time that the BOE would be the first of the major central banks to raise rates. Lately, that has come into focus as the bank’s rhetoric shifted from talking about employment to talking about inflation.

Despite the UK having relatively low CPI change, it’s still above target. And the BOE at no point pledged to tolerate higher inflation to compensate for prior deflation.

Yesterday, money markets adjusted to an expectation that the BOE would raise rates at their December meeting.

There is only one more meeting before that, and the consensus is that the BOE will likely offer some kind of advance warning that a hike is coming. This means there is a lot of anticipation building up ahead of the November 4th meeting.

What we’re looking for

Naturally, that means a lot of focus is on the upcoming data releases.

Tomorrow’s inflation data will be the last before the next BOE meeting, so investors are likely to pay a lot of attention to it. Not only could there be an immediate reaction in the market, but the results could pave the way for the market trend for the rest of the month.

Economists anticipate that the annual Headline Inflation will remain at last month’s level of 3.2%. That’s well above the 2.0% target of the BOE.

However, the central bank focuses on the core inflation rate. This figure discounts the price changes in food and energy, and it’s one of the major price drivers as of late in the UK.

Where the complication could lie

Economists expect the annual Core CPI change to show a slight decrease to 3.0% from 3.1%. Of course, that’s still way above target.

A trend towards the downside could be an indication that inflation isn’t as transitory as the BOE expects it to be. This would reduce the pressure on the bank to act quickly. And in turn, they might consider holding off on raising rates for a little while longer to continue to support the economy.

Nonetheless, the monthly change in inflation might be the deciding factor because it’s a “faster” indicator showing what’s going on right now. This is contrary to the annual comparisons, which consider the change in prices compared to a year ago. Monthly inflation could drop to 0.4% from 0.7%, a notable deceleration.

Putting the pieces together

The market has priced in these expectations, so the question is: what could happen if these projections don’t pan out?

If we see a marked reduction in the inflation rate it could lead investors to adjust their expectations for a later rate hike. And this would imply a weaker pound and support for the stock market.

On the contrary, the expected drop in near-term inflation might not manifest, or worse, actually accelerate. That would likely affirm the market’s expectation that the BOE will raise rates, and push the pound higher.

However, there is a pretty strong consensus that a rate hike won’t come as a surprise. So, it’s unlikely that the market will move up expectations of a rate hike to November.