The Bank of England looks set to hold its benchmark rate at Thursday's meeting, extending a wait-and-see stance even as investors price in more than 100 basis points of hikes. Analysts at Danske Markets expect the central bank's next move to be a cut rather than a hike, though data releases ahead of the meeting could push the tone more hawkish.
Inflation stays contained despite energy costs
Ofgem's energy price cap pushed headline UK inflation up 0.3 percentage points to 2.9% in July, while core inflation held flat at 2.6% for a third straight month. Businesses show little sign of passing higher transport costs through to broader pricing. The BoE's Decision Maker Panel put firms' year-ahead inflation expectations at 3.8% in the three months to August, a figure trending down but still above levels seen before the Iran war.
Growth holds up, labour market cools
UK GDP rose 0.4% in July, driven by a stronger service sector, according to Danske Markets. The August labour market report pointed to moderate cooling, with unemployment steady just below 5%, while employment growth turned negative and wage growth trended lower. Fresh labour and inflation data are due in the days before Thursday's decision.
Bailey holds the line on market pricing
Governor Andrew Bailey dismissed the market's aggressive rate pricing this week as reflecting a large risk premium, telling a parliamentary briefing he remains in wait-and-see mode despite the deterioration in energy markets. A rate hike would most likely require Bailey and Deputy Governor Lombardelli to tip the Monetary Policy Committee's vote, and Danske Markets expects Thursday to repeat July's 6-3 split.
Base case: hold until 2027, upside risk for EUR/GBP
Danske Markets' base case keeps Bank Rate unchanged at 3.75% until Q2 2027, when the bank could deliver another 25 basis point cut. Still, the bank says the cost of an "insurance hike" has declined, and a hike becomes more likely if energy markets fail to improve and growth stays resilient. With more than 100 basis points of hikes priced into markets, Danske Markets sees the balance of risk tilted toward a less hawkish outcome than investors expect, leaving upside risk for EUR/GBP.
Source: ActionForex
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