Just a month ago, we were still debating about 6% rates for the BOE outlook but all of a sudden now, markets are only seeing just a little over one more rate hike for the central bank. Here’s a look at the change in the OIS market pricing:
The odds of a 25 bps rate hike this week now stand at ~83%, with the remainder siding with no change. So, what has changed?
For one, the worsening symptoms in the UK economy are to blame as high inflation continues to bite. Retail sales activity and consumption have been extremely poor and the services sector is now also starting to come under pressure. Adding to that is employment conditions are also starting to be impacted as seen here last week, while wages are still keeping relatively hot.
It’s a fine line for the BOE and they really don’t have much room for comfort in trying to navigate a soft landing from here. Not least when inflation continues to hold at high levels as seen for now.
As central banks are moving to being “data dependent”, essentially that is what markets are doing too. And the verdict is that the BOE will not be able to get away with more rate hikes than they intend to, so long as the economic trajectory continues on its current path.
With the Fed and ECB moving to the sidelines, the BOE seems to be the ones lagging behind. They now run the risk of overtightening by doing too much and in terms of the optics, that’s a bad place to be – especially in a time when that is perhaps the most important thing to central banks right now i.e. public image/reputation.
I wouldn’t be surprised if the BOE does start to lean towards a pivot after this week but the best thing that they can do is not to be explicit. Otherwise, they also run the risk of not doing enough in the fight against inflation and that’s an even worse outcome after all the work they have done to get to this point.
