The Bank of England could raise rates on Thursday, but the outlook could be just as important for the pound come Thursday.
Bank of England meeting: when and where?
The Bank of England (BoE) will provide their latest monetary policy announcement at midday, on Thursday 4 November 2021.
Tune in to IGTV’s live BoE announcement and analysis at 11:55 AM BST on Thursday in the IG platform.
Inflation concerns provide basis for potential action
Much like many other nations around the world, the UK has seen a sharp rise in inflation over the past year. While the bank will consider a range of indicators, it is the 2% inflation target which is the key mandate for the bank to follow.
However, consumer price index (CPI) inflation currently stands at 3.1%, with rising commodity prices helping to push costs up across the country. Unlike the European Central Bank (ECB), we have seen the BoE warn that they will likely need to act in a bid to stem this rise in prices, with many now increasingly confident that this will be more than simply “transitory”.
Elsewhere, we have seen the economy continue to strength over recent month, with elevated growth providing grounds for optimism going forward. We keenly await the latest quarter three (Q3) gross domestic product (GDP) figure due next week, but that quarter two (Q2) figure certainly highlighted how a surge in consumption has helped drive expansion over the period.
That being said, there are some questions over whether labour and supply-chain issues will hinder the ability to fully exploit the opportunity ahead.
On the jobs front, we have seen unemployment turn lower over the past year. With headline unemployment down to 4.5%, there is still plenty of improvement needed to get back to pre-Covid-19-pandemic levels of 3.8%.
However, looking at the record level of vacancies available within the UK at the moment, it is clear that the unemployment rate is more about failing to find the right person rather than an unwillingness to hire.
All in all, we have clear improvements on the economic front, with rising inflation. This forms the basis for a tightening phase from the BoE if they believe such a move would have the ability to lessen the price growth. It is worthwhile noting that the removal of furlough support could yet push unemployment higher.
Will we see the bank hike?
Andrew Bailey changed the game back in mid-October, with comments from the governor leading many to believe a November hike was largely a foregone conclusion.
Things have calmed down since, with markets pricing a hike at 62% (down from 82% two weeks ago). The fact that markets now price a 38% chance that the bank will keep rates steady does raise a risk for sterling bulls. Perhaps more interestingly, the outlook for the coming 12 months has also caught the eye. Markets are currently pricing a massive 65% change that rates will be above 1% by August 2022.
That means that the BoE will more than likely raise rates in four of the next seven meetings.
The question for many this week will be not just whether the BoE decided to raise rates, but also whether their language will support or shift this longer-term outlook.
It seems somewhat unlikely that we will see rates rise as quickly as seemingly anticipated, and thus there is room for a dovish shift even if we did see a 25 basis point rise on Thursday. A look back at historical rates will highlight how a rise above 0.75% would represent the highest interests seen since 2009.
Where now for the pound?
EUR/GBP looks the most interesting pair to watch given the ECB’s apparent willingness to hold off on any tightening through this period of above-target inflation. The losses seen over the course of October highlight the feeling that we could see a carry trade develop, whereby rising UK rates provide a basis for holding the pound over the euro.
However, we have seen the pair gain ground in advance of the meeting, with some concerned that the meeting could ultimately bring a major adjustment in terms of rate expectations for the year ahead. As such, while the headline announcement will be important, it will be crucial to look at the breakdown of votes and commentary over where the monetary policy committee (MPC) sees things in the medium term.
This daily chart does highlight that we are clearly trending lower, with any near-term upside providing the basis for further selling. That bearish wider trend holds unless the price breaks back up through the £0.8658 resistance level.
03 November 2021