BoE to 'not rock the boat' on Thursday – Gilt markets doing 'much of the heavy lifting'

We expect the MPC to hold its base rate steady at 3.75% on Thursday, with the committee to refrain from overreacting to the jump in oil prices. Our call for no change is predicated on a handful of key factors, namely the below:

UK gilt markets are doing much of the heavy lifting. Sovereign bond yields globally have continued to rise in recent weeks, and gilts have been no exception. UK yields remain the highest in the G7, with the 30- year yield rising to its highest level since 1998, while the 10- year has jumped to its highest since the GFC.

This both acts to weigh on the growth outlook, while effectively tightening financial conditions in its own right - a dynamic that the committee itself has acknowledged. We think that officials will be also cognisant that raising rates risks compounding the sell-off in an already strained debt market.

Incoming data flow since the last MPC meeting has not changed the narrative that the labour market continues to exhibit excessive slack. Payrolled employment fell again in August and has now dropped by 215k since Labour took office. Wage growth continues to ease and appears consistent with the MPC’s inflation target, with no suggestions that it will rise materially anytime soon.

The current inflation shock remains a supply-side issue, not one of overheating demand - the transmission that the MPC would ordinarily worry about. As mentioned, we have also not seen a broadening in price pressures to wages or services inflation that we saw following the 2022 energy shock, suggesting that any spike in headline inflation would be both absent from the core measure and largely temporary.

We think that the looming Autumn Budget provides further incentive for the MPC to not rock the boat too much.

Higher borrowing costs, weaker growth and lower tax revenues risk feeding into precisely the kind of self-reinforcing spiral we've flagged ahead of previous budgets. A rate hike now would only add to that fiscal strain, and we don't think the MPC will want to be seen exacerbating the problem.