Market Analysis

Could Above-Forecast UK CPI Tip BoE To A Hawkish Hold On Thursday?

Markets are justifiably not expecting the Bank of England to raise interest rates on Thursday but Tuesday’s above forecast rise in UK Consumer Prices (CPI) may well have laid the foundation for the BoE to make a “hawkish hold.” Posting above the 2.8 per cent rise expected by economists polled by Reuters and in contrast to the 2.6 per cent prints seen in both June and July, UK CPI for August showed an increase of 2.9 per cent year-on-year. And while the BoE itself expects UK CPI to hit about 3 per cent in October, largely driven by the currency effect of the pound’s post-Brexit slide, the recent general rise in the value of the euro (EURUSD, EURJPY) and in particular versus sterling (EURGBP) might imply that the degree of currency weakness-related inflation in the UK CPI data might persist for longer than the British central bank had originally envisaged.

It might be that external Monetary Policy Committee members Ian McCafferty and Michael Saunders, who have already been voting in favour of an immediate 0.25 per cent rate hike, are joined by their fellow MPC member BoE Chief Economist Andrew Haldane in pressing for a tightening of monetary policy. A 6-3 vote to keep rates unchanged, as opposed to 7-2, especially in the context of sterling’s recent weakness on a trade weighted basis, could prove rather unnerving for traders whose current perception is for continuing weakness for the pound.

Written by Neal Kimberley, External Currency Analyst.