Bank of England preview: when to hike?

• No change in policy expected
• QE on autopilot into year-end
• Rate hike timing in focus with inflation outlook in question

Don’t expect fireworks from the Bank of England tomorrow (Thursday Jun 24^th, 12:00 BST) – the Bank won’t be changing policy or announcing anything new – but there is still scope for volatility around the meeting. Inflation looks like it might be more of a problem than the Bank of England’s forecasters have led us to think.  Andrew Bailey has made it clear the MPC won’t hesitate to act on rising inflation and high frequency data indicates this could become a problem for the Bank. Considering the Fed’s move last week to signal it’s not so deaf to inflation risks as we had been led to believe, could the BoE be the next central bank to deliver a hawkish surprise? I’m not so sure – not for this meeting at least since the UK economy has a little further to go yet and the BoE is not facing any pressure to act early.

It seems unlikely that the Bank of England, absent any fresh economic projections, will seek to signal it is worried about the path of inflation at this meeting, preferring to wait for some more data over the summer as the post-lockdown spike in activity starts to wane. Nevertheless, given the QE programme seems to be an autopilot to end this year – some further tapering to be announced in due course so it keeps buying through to Dec – the market attention seems to rest firmly on the timing off lift-off for policy rates.

Current market expectations indicate hikes in Q2 next year. However, it would not be a major surprise if the Bank were to act faster due to rising inflation, with perhaps 2-3 hikes next year beginning in Q1 2022. Wage growth from a shortage of workers is one factor to consider that could make above-target more sustained without tightening so comments on the labour market will be very carefully considered. We would also need to be mindful of household savings being unleashed more than the roughly 10% the Bank expects.

CPI rose 2.1% last month on an annual basis, up from +1.5% in April. The rate of month-on-month inflation was +0.6% as the economy reopened more. Of course, base effects exert a strong influence but there are a couple of points I made at the time which I believe are important. First the core reading of +2.0% was well ahead of the consensus +1.5%. Second, watch that second consecutive +0.6% month-on-month reading, which is about more than just base effects from last year.  Couple more month-on-months like that and MPC will have to act.

Today’s PMI survey also points to strongly rising inflation. The release notes: “The rate of input cost inflation accelerated for the fifth month running and was the joint-fastest on record, equal with that seen in June 2008. While inflation continued to be led by the manufacturing sector, service providers also posted a marked increase in input prices. In turn, the rate of output price inflation hit a fresh record high for the second month running.” The evidence from the survey is strong suggestive that inflation will rise well above the Bank’s 2% – the question is how far above and for how long? Again, it’s the whole transitory question mark over inflation that is bedevilling the Fed. Anyway, right now the Bank will stand pat and not wish to deliver anything like a hawkish surprise. Tapering is underway to let QE expire by the end of the year, and this is not the time for the BoE to signal it’s in a rush to raise rates too. Over the coming weeks and months I expect markets to bring forward rate hike expectations as the BoE reacts to strong inflation readings and for this to lead to a stronger pound with cable to retest 1.4250 in Q3 2021, with a potential move to 1.45 thereafter.