BoE to leave rates unchanged as weak sterling creates strong buying opportunity
Bleak trends in UK productivity are expected to trigger a downgrade in the OBR’s growth forecasts ahead of this month’s Autumn Budget.
Given Labour’s limited appetite for spending cuts, and the apparent absence of room for further borrowing, this only means one thing: even larger-than-expected tax hikes on 26th November.
Rumours that this could entail an increase in income tax rates for higher bracket earners has not gone down well, as this would not only break the government’s campaign pledge, but possibly spell doom for Britain's economy in 2026.
To make matters worse for the pound, some Bank of England officials have been making dovish noises, and markets are now pricing in a 30% chance of a cut at Thursday’s meeting.
We still think that the hawks will carry the day and rates will be left unchanged, but there will likely be a handful of dissents in favour of a cut.
There is an argument, however, that sterling's steady underperformance is starting to create a buying opportunity, particularly should the budget be less damaging than fears, and the MPC hold rates through year-end.
Author
Matthew Ryan, CFA
Ebury
Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.
