BoE to 'stand ready to hike', committee remains 'deeply divided'

Matthew Ryan, CFA Ebury

Thursday’s Bank of England meeting is at risk of being somewhat lost in the mayhem this week, sandwiched in between two rate decisions that carry far more weight - that of the Fed on Wednesday and Bank of Japan on Friday.

We expect the MPC to hold its base rate steady at 3.75% on Thursday in an unchanged 6-3 vote. Basic arithmetic suggests that the bar is low for the balance to shift, as it would only take a couple of the doves to change ranks in order to force a hike.

Yet the committee remains so deeply divided, and officials appear so entrenched in their respective stances, that we think it would take a lot for even one member to alter their vote, or for the bank to shift its rhetoric in a hawkish direction.

Swap markets continue to fully price in a hike from the BoE in November, which we still maintain is excessive. Gilt yields have surged to multi-decade highs, second round inflation effects are absent and Britain’s jobs market remain extremely fragile - a net 216k jobs have now been lost in the private sector following the release of yesterday’s data for August.

We instead expect the statement to lean on familiar language that it stands ready to hike, rather than firmly committing to it. Clearly markets don’t agree with this assessment, so we’ll either be proved very right, or very wrong on Thursday afternoon.

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.

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