Bank of England set to raise rates for a 14th consecutive time

OVERNIGHT

The recent souring in risk sentiment continued to persist with most major equity indices trading lower across the Asia-Pacific region. This follows falls on Wall Street and across Europe as markets reflected increased concern over the US fiscal outlook. Stocks in China bucked the trend, moving higher on the day, following the better-than-expected outturn in the July Caixin services PMI. The 54.1 print was above the 52.4 expected and June’s 53.9.

THE DAY AHEAD

Today’s main focus will be the Bank of England policy announcement, with the MPC set to increase interest rates for a 14th successive meeting. The key uncertainty, however, is by how much with expectations between a 25bp and 50bp hike finely balanced. Overall, we see grounds for the MPC following up June’s 50bp hike with a move of the same magnitude and thus forecast Bank Rate being lifted from 5.00% to 5.50%. The risks of a smaller 25bp rise, however, are also high, given the downside surprise in June CPI inflation (7.9%) and the softening in latest GfK consumer confidence and PMIs for July. On balance, however, we lean towards expecting a second successive meeting increase of 50bp on the basis of elevated risks of ‘inflation persistence’. Notably, the detail of the latest CPI – despite it surprising on the downside – showed services inflation remaining above the BoE’s forecast. Pay growth, a key input into services prices, is also running above the Bank’s forecast. But to reiterate, the upcoming policy decision is likely to be a close call.

There will also be attention on any guidance the BoE provides on future policy after August. We expect its guidance to be similar to June, leaving the door open to more tightening. However, the Bank’s new economic forecasts will also be published, which will be predicated on updated market interest rate expectations. In particular, market pricing for interest rates had recently risen to a peak of about 6%, with the signal that it may be considered excessive if it leads to the inflation forecast to undershoot its target in the medium-term horizon. Governor Bailey along with members of the MPC will speak at a press conference from 12.30 BST.

Ahead of that, the BoE will release the results of its latest Decision Maker Panel (DMP) survey. The report provides a key input into the decisions taken by the MPC, and the update will be closely watched for clues on the outlook for prices and wage inflation.  Elsewhere, the final readings of services PMIs in the UK and Eurozone will attract only limited attention. Greater focus will be on the US services ISM report. Following June’s strong reading (53.9) the headline measure is expected to soften to 53.0 in July, still signalling robust expansion across the sector.

MARKETS

Bond yields have risen in response to the fall in risk sentiment with US 10-yr yields pushing further above the 4% mark. That has supported the US dollar, which has driven GBP/USD below 1.27 and EUR/USD further below 1.10.