Bank of England interest rate expectations have surged after some unwanted inflation and wage growth data in the past six weeks.
The base rate is currently 4.5%, after the BoE’s monetary policy committee (MPC) hiked by a quarter of a percentage point at the meeting in May.
Markets currently are pricing in another rate rise at next Thursday’s meeting, followed by four or five more rate increases to a peak of either 5.75% or 6%.
The first cut is not expected until June 2024.
Hints on the future
As next week’s hike is widely expected and fully priced in by the markets, the focus will likely be on any indications regarding the future rate path, said economist Anna Titareva at UBS.
“However, we do not expect much news on that front, with the MPC likely keeping the forward guidance unchanged, stressing its data dependence and reiterating the degree of labour market tightness, wage growth and services inflation as key metrics to monitor.”
How the MPC members vote – it was a split vote with seven for and two against last time – might prove instructive as to whether the committee might be closer to their perceived peak rate than the market thinks, said analysts at AJ Bell.
At Barclays, this was felt to be unlikely, with economist Silvia Ardagna expecting only one or two votes against a 0.25 percent hike to 4.75% and “a hawkish twist to communication, hinting that limited additional rate increases might be needed, even in the absence of further upside inflation surprises”.
As the BoE’s remit is for inflation to be 2% or under, the problem for the MPC is that its hikes up to this point are not slowing the UK economy as much as it would like, with a surprisingly high inflation rare in April, a pick-up in wage growth remaining – both higher than the committee expected even with its upgraded May forecasts.
But a major pushback to the market’s hawkish expectations is unlikely, reckons James Smith, an economist at ING.
“The Bank has had ample opportunity to sound the alarm over recent days and has opted against doing so. Unlike the Fed and ECB, the BoE typically offers very little commentary between meetings. Without additional guidance, markets have interpreted the recent wage/inflation surprises as requiring a significant monetary policy response.”
Economists have mostly not raised their forecasts as high as the market is currently pricing, with UBS’s Titareva having only added a hike on 3 August to a terminal rate of 5%, ING also seeing 5%, Capital Economics forecasting a peak of 5.25%. Barclays is at the top end with a 5.5% peak by November.
Inflation and other macro data
Against this backdrop, the next few inflation prints, the first of which is next Wednesday, 21 June, along with next CPI and labour market prints from July to September will be crucial.
Wednesday’s headline CPI rate is expected to show inflation dipping to 8.5% from 8.7% for May, with core CPI barely predicted to ease at all from 6.8%.
Other notable UK macroeconomic data in the coming week are Friday’s GFK consumer confidence and retail sales. Consumer confidence has improved from the records lows last autumn, with the May’s index printing at -27 from -30 in April.
“For an economy that is wrestling with food price inflation of close to 20% the resilience seen in the UK consumer has been even more surprising so far this year,” says Michael Hewson at CMC Markets.
April saw retail sales excluding fuel rise by 0.8%, partially reversing a sharp 1.4% decline in March, which in turn reversed a 1.4% gain in February.
For May, estimates are for retail sales to fall by a modest -0.2%, even with recent updates from a few UK retailers pointing to continued resilience when it comes to spending patterns.
'Flash' purchasing managers' index (PMI) survey data on Friday will also be closely watched in the UK and other major economies.
The UK manufacturing PMI is seen falling to 46.8 from 47.1, with a decline also for the larger services sector to 54.8 from 55.2.
Economists at Deutsche Bank said: "Markets will be looking forward to the latest global flash PMIs on Friday to get the latest pulse check on growth among the key economies...The focus will also be on the wedge between the still-robust services and lagging manufacturing gauges across key economies, especially the extent to which the former can continue to power growth despite all the central bank tightening this cycle."
Important US data will be scarce.
Apart from US PMIs later in on Friday, other big US economic data points in the week being building permits on Tuesday, and Federal Reserve chair Jerome Powell’s Capitol semi-annual testimony on Wednesday and Thursday.