BoE decision in focus

Preview: With the Fed decision in the rearview mirror, the focus now shifts to the BoE update.

The day that is: BoE update in focus

Following yesterday's Fed decision, the BoE will hit the wires today at 11 am GMT. The bank rate has sat at 3.75% since a run of cuts ended in December, and the Committee has now held that level for five consecutive meetings. However, the mood among MPC members has shifted hawkish. At the last meeting in July, it was a 6-3 hold, with three policymakers (including chief economist Huw Pill) pushing for an immediate move to 4%.

Inflation is forcing the issue. The August UK inflation data landed earlier in the session yesterday, and aside from some softening in the services print (both MM and YY), it was largely in line. YY headline came in at 3.1%, up from 2.9% in July – underpinned by ‘motor fuels’ – with YY core also coming in as expected at 2.6%.

BoE pricing has shifted modestly dovish for today’s meeting compared to a month ago, bringing the odds from 30% to around 20% for a hike (80% for a hold). Further out on the curve, however, we remain pretty much unchanged, with a cumulative 48 bps worth of hikes implied by year-end. 

With a hold decision largely baked in, the MPC vote split will be important to monitor. Anything tighter than 6-3, or language that leans harder into inflation risk, would likely read as a hawkish signal for the GBP even without a rate move.

The day that was: Fed hikes rates – Upgrades growth and inflation forecasts

The Fed bank unanimously raised the target rate by 25 bps to 3.75-4.00% yesterday; this was not much of a surprise, as the futures curve largely priced it in and about 80% of the economists polled by Reuters called for a hike.

The updated SEP showed that 16 of 18 Fed officials (Fed Chairman Kevin Warsh did not submit a dot) expect at least one more rate hike by year-end, with two members electing to hold at current levels. Next year, projections indicate rates will remain in this range before easing in 2028. We also saw that 8 officials see another rate increase next year, while 6 call for no change, 4 opt for a rate cut, and 1 calls for rates to 3.25%. Interestingly, they also raised their long-run view to 3.2% from 3.1%.

On economic projections, Fed members see faster growth this year and next, up to 2.3% (from 2.2%) and 2.4% (from 2.3%), respectively. The accompanying rate statement said that economic activity is ‘expanding at a solid pace’. For unemployment, the projections indicate the jobless rate will remain at 4.1% and hold until 2029, with the statement adding that ‘job gains have kept pace with the workforce, and the unemployment rate has changed little’. Finally, PCE inflation ‘remains elevated’ per the statement, with the year’s outlook higher at 3.7% (headline) and 3.4% (core), then expected to ease to 2.3% and 2.5%, respectively. 

Ultimately, the hike – and another rate increase on the table this year – along with the updated economic projections reads as hawkish and, in my view, allowed Warsh to regain some credibility. However, besides posing greater risks to the labour market, this hike will do little to reduce a supply-driven shock. Warsh’s comment that the rate increase was to ‘remove a dose of accommodation’ suggests policy is not restrictive enough and that he is open to additional tightening. The Fed clearly has more work to do here; you typically do not see a one-and-done move from this bank.

Market snapshot this morning

The USD caught a solid bid following the rate decision and press conference, weighing on its G10 peers, with the OIS curve now fully pricing in another Fed rate hike as soon as October.

The US 10-year Treasury yield is hovering right around the 5% threshold – its highest since 2007 – pushed up by energy-driven inflation and confirmation of the Fed hike. Japanese 10-year JGB yields have also climbed to around 2.98%, a fresh multi-decade high, as expectations of BoJ tightening build (markets are now pricing in around an 80% chance of a hike on Friday).

US equity benchmarks pulled back on Wednesday following the Fed decision: Dow -1.2% to ~51,460; S&P 500 -0.5% to ~7,552; Nasdaq roughly flat. Overnight trading saw Asia-Pac shares up modestly, with Japan's Nikkei currently up 0.3% and South Korea's Kospi trading as a standout gainer in recent sessions on chip-sector strength (Samsung, SK Hynix).