Markets expect BoE will raise rates again today

OVERNIGHT

China’s equity markets are closed for a holiday today but those Asian markets that are open are mixed with some up modestly. That is despite falls in European and American markets yesterday reflecting interest rate uncertainty. In Congressional testimony, Federal Reserve Chair Powell again indicated that last week’s US interest rate pause is most likely temporary and that rates will probably be raised again in the second half of the year.

THE DAY AHEAD

In light of recent higher than expected outturns for both UK CPI inflation and wage growth, markets see a thirteenth consecutive interest rate increase today by the Bank of England as a near certainty. Indeed, in light of yesterday’s data which showed a further sharp rise in ‘core’ inflation adding to concerns of a ‘second round’ of price pressures, there has been speculation that rates may be raised by 50 basis points rather than a third consecutive 25bp hikes. In the event of a rise, it will be interesting to see if the two policymakers who have voted against recent increases do so again and whether anybody votes for a larger increase. 

With markets discounting several further interest rate hikes by year end, taking them close to 6%, it will also be important to see what forward guidance is offered today. This is not one of the meetings where the BoE Governor holds a press conference or where forecasts are updated but the press statement and meeting minutes will offer clues. Policymakers may merely say that further moves are ‘data dependent’ but markets will be looking for any reaction to the currently discounted interest rate profile.  

The Swiss National Bank and the Norges Bank will also update on policy this morning. Both are expected to raise rates by 25bp. For the SNB, that would be a downshift from the two previous 50bp moves and so some economists are looking for another 50bp hike.

In the US, weekly jobless claims data will be watched closely particularly as recent reports have provided tentative signs that the tight labour market may be starting to ease. It is also the second day of Fed Chair Powell’s semi-annual testimony to Congress. Yesterday he mostly just reiterated the message from last week’s monetary policy update. 

Early tomorrow the latest UK consumer confidence and retail sales data will be released. Confidence has picked up this year despite concerns about inflation and interest rates, and we expect another modest rise in June. We also forecast a small rise in May retail sales. 

MARKETS

UK gilt yields initially rose sharply in early trading yesterday following the higher-than-expected UK inflation outturn but partially fell back later. Meanwhile, sterling gained ground against a generally weaker US dollar but slipped against the euro. The focus will primarily be on the BoE announcement today with markets now expecting another rate hike but unsure of its magnitude.