BoE Preview: Anticipating a Tight Vote for Maintaining the Status Quo

The Bank of England’s upcoming meeting in November appears to be one of the most predictable ones in recent memory, despite the famous saying about the unpredictability of events. Since the current tightening cycle began in late 2021, the decisions have often been closely contested. In the last meeting held in September, the committee was evenly split, resulting in an unusual 5-4 vote to keep rates on hold. One might assume that such a level of division suggests a high possibility of a rate hike in November. After all, a single committee member changing their stance could tip the balance in favor of tightening. However, we remain skeptical about this scenario.

First and foremost, it’s essential to acknowledge that there has been limited data available since the September meeting, and the data released is unlikely to have significantly influenced the Bank of England’s decisions. The Bank has been clear about its focus on three key data points to guide its policy: private-sector wage growth, services inflation, and the vacancy-to-unemployment ratio, which measures labor market tightness. While private-sector wage growth and services inflation remain uncomfortably high, they haven’t shown significant surprises in recent releases. Services inflation is slightly below the Bank’s August forecasts, while wage growth is slightly above.

Regarding job numbers, their reliability is currently in question, making policymakers hesitant to rely heavily on the latest unemployment figures. The job market is evidently cooling, but the extent and speed of this slowdown are less clear. Notably, the committee is displaying caution regarding the latest wage figures, indicating that private-sector pay growth at 8% year-on-year is at odds with other data suggesting a more rapid decline.

In summary, if a committee member voted for a rate hike in September, they will likely do so again, and vice versa. Additionally, considering that one of the members who voted for a hike last time, Jon Cunliffe, has since left the committee, there is a sense that his successor, Sarah Breeden, is less inclined to go against the consensus (and the Governor) in her initial meeting. Therefore, the base expectation for this week’s meeting is a 6-3 vote in favor of keeping rates unchanged.

The key message expected to be reiterated by the committee is “higher for longer,” indicating that interest rates are likely to remain at current levels for an extended period. It is unlikely that the committee will completely rule out the possibility of further tightening. Still, policymakers are likely to emphasize the necessity of keeping rates at these levels for a significant duration. Anticipate hearing repeated references to rates needing to stay “sufficiently high” for “sufficiently long.”

This message is anticipated to be reinforced by the new forecasts. Although oil and gas futures have risen since August, market rate expectations for the UK are notably low, which is a crucial factor for the Bank’s models. While global yields have increased, the significant downward revision of BoE expectations over the summer in the UK stands out. Market pricing for Bank Rate in two years has decreased by approximately 40 basis points since August. Inflation forecasts might see a slight uptick, and it is expected that the Bank’s Consumer Price Index (CPI) forecast for mid-2025 will hover around the 2% target, particularly when applying an “upside skew” to the model-based forecasts, which have consistently been below 2%.

However, it’s essential not to read too much into these forecasts, as policymakers have displayed diminished confidence in their models recently. Nevertheless, a medium-term inflation forecast aligning with the target, based on a yield curve indicating minimal easing over the next couple of years, will be cited as another rationale for maintaining higher interest rates over an extended period.

Leading up to the Bank of England (BoE) meeting, money markets are embracing the notion of a prolonged period of higher interest rates. Market expectations widely predict the bank rate to remain unchanged during this meeting, although there is still a roughly 30% chance that the central bank might opt for one more rate hike in the coming months. Beyond this point, markets are factoring in the possibility of a first rate cut, potentially occurring as late as September next year.

In the context of longer-term rates, such as the 10-year Gilt yield, there is a notable correlation with short-term rates. However, these longer-term rates are also influenced by rising US yields, particularly over the past month. Despite this, the 10-year Gilt yield has maintained a sideways movement since July. While it currently sits closer to the upper end of its range, a significant deviation, such as a surprise rate hike from the BoE, would be necessary to push yields substantially higher, potentially reaching 4.8%. This scenario is contingent upon global central bank patterns evolving.

Considering other significant events occurring in the same week, it will be challenging to isolate the BoE’s impact on long-term rates from other influencing factors. Medium-term models based on the money market curve suggest that the 10-year Gilt yield remains responsive, currently reflecting the forward horizon for the market’s first anticipated rate cut.

In the foreign exchange (FX) markets, the BoE’s sterling trade-weighted index has maintained a relatively subdued stance within narrow ranges throughout October. It is anticipated that a hawkish hold during the BoE meeting might not significantly impact the value of the pound (GBP). The outlook for GBP/EUR remains at 0.87 by year-end, with a possibility of trading up to 0.90 next summer, reflecting a shift in market expectations towards a more traditional easing cycle for the Bank of England.

Additionally, it’s crucial to note that GBP/USD exhibits a notably positive correlation with US equities, suggesting that the pound could experience further underperformance if there is an increase in equity sell-offs. The baseline expectation remains that GBP/USD will conclude the year at 1.22. However, in the event of a worsening global equity market situation, there is a potential for an intra-month drop to 1.1750.