Bank of England rate preview: will above-target inflation bring a more hawkish BoE?

When and where?

The Bank of England (BoE) will commence their latest monetary policy announcement at midday, on Thursday 24 June 2021.

Tune in to IGTV’s live BoE announcement and analysis at 11:55 AM BST on Thursday in the IG platform.

FOMC meeting shakes up expectations ahead of Thursday

The Central Bank outlook has taken a turn over the past week, with the Federal Open Market Committee (FOMC) meeting bringing a surprisingly hawkish turn. The adjustments to the dot plot brought an outlook where not only should we expect two rate hikes in 2023, but many members voted to start raising rates in 2022.

What is notable about this shift in outlook from the Federal Reserve (Fed) is that it does highlight the fact that members are taking the recent rise in inflation seriously.

Despite chair of the Federal Reserve Jerome Powell’s insistence that transitory inflation was expected and could be overlooked, this shift from the Fed highlights how there are many who fear this rise could be longer lasting than previously expected.

Crucially, regardless of the fact that a rate hike remains some way off, the decision to bring forward a hike would also have consequences for a tapering timeline.

With that in mind, this BoE meeting will likely be filled with the same questions over inflation and the impact it could have upon tapering and rates.

What does the recovery look like?

Last week saw an impressive job report out of the UK, with a sharp -92.6k decline in claimants coming alongside a tick lower in unemployment.

That theme of tightening hiring conditions was reiterated in the purchasing managers index (PMI) release, with the employment aspect of the survey highlighting how the reopening has led to a ramp-up in employment.

The composite employment index from Markit shows how employment growth across both manufacturing and services has burst into multi-year highs after a volatile 2020.

Nonetheless, both PMI surveys did decline in June, highlighting a slow down in the rate of growth both manufacturing and services. Much of that came as a result of price pressures, with input costs rising at the fastest pace in 13 years.

That threat posed by inflation has been front and centre of concerns in China, with the worlds top commodity consumer doing their best to drive down prices over the past month. That should help ease some of the fears around cost-push inflation, but questions remain over the degree to which China can keep prices depressed.

UK inflation finally topped the 2% target provided by the Chancellor, with headline consumer price index (CPI) now up to 2.1%. While the Fed has an average inflation target which allows for a period of above-target prices, the BoE has a hard target of 2%.

That puts pressure on the bank if prices continue to rise. Interestingly, core inflation is now up to 2%, which does eradicate the story that this rise has been driven by temporary moves in energy prices.

Interestingly, the breakdown in CPIH inflation highlights major contributions from the likes of clothing and automobiles. There are many who believe those prices will calm down before long.

What to look out for this time around

Andy Haldane was the one Monetary Policy Committee (MPC) member to vote for a reduction in the asset purchase facility in May, and there is a strong chance we will see him do the same at his final meeting this Thursday.

With inflation up to the highest level in almost two years, the big question will be around what other members could join Haldane in voting for a taper. There is essentially no chance of a rate hike this week, with market pricing in a measly 0.8% chance of a such a move on Thursday.

Nonetheless, with the employment picture improving and inflation above-target, there is a strong chance that the tone of the meeting takes on a more hawkish slant.

Nonetheless, with the government delaying the full reopening of the economy until July, and significant questions over the longevity of this rise in prices, the degree of hawkishness with which Andrew Bailey carries himself will be key for the market reaction.

Where now for the pound?

The degree of hawkishness in this meeting will have a tangible impact upon GBP/USD. The pair has been hit hard since last week’s FOMC meeting, with price falling through trendline support.

That raises the risk of another leg lower, and the BoE meeting should give us a crucial determinant of whether or not that occurs. Crucially, we want to see whether it is only the Fed that is hawkish, or whether this is a new norm for central banks. A failure to tout a similarly hawkish line could bring another move lower, with the current rise looking like a retracement before prices fall once more.

While further near-term upside looks likely ahead of the meeting, the existence of trendline and Fibonacci resistance does raise risks of another move lower dependent on how the meeting goes. We would ultimately need to break up through the $1.4249 level to bring an end to these bearish questions.