Week ahead: Bank of England to hike in face of inflation wage price spiral nightmare

The Bank of England is widely anticipated to raise interest rates once again, a day after inflation figures for the UK are set to show persistent price pressures. Wage data last week helped drive gilt yields to their highest in 15 years and markets moved to price at least another 125bps in hikes by the BoE. Elsewhere, Japan’s inflation data will be watched after last week’s BoJ decision, whilst the week rounds out with PMI data on Friday.

Here are the week’s key events:

Monday

US cash equity and bond markets are shut for a holiday, which may ensure volumes are thinner than usual at the start of the week. Elsewhere, UK house price data and the German Buba report are due out ahead of the European session. Markets will be moving on from last week’s triple-whammy of central banks amid a quiet period for corporate earnings.

Tuesday

Flash manufacturing PMI data and industrial production figures from Japan are the first economic releases of the day of note , whilst monetary policy meeting minutes from the Reserve Bank of Australia are also due up. Later we get data on German PPI inflation, followed by US building permits and housing starts. New Zealand’s GDT price index is scheduled last thing. FedEx is due to report earnings.

Wednesday

Japan’s national core CPI inflation sets the tone for the day, with traders eyeing whether a prolonged overshoot might push the Bank of Japan into changing course. UK CPI inflation for May is the big one ahead of the Bank of England meeting. Headline CPI dropped to 8.7% in April, from 10.1% the month before, but core inflation jumped to 6.8% from 6.2%, fuelling expectations the BoE will need to keep raising rates. Strong wage data last week further cemented the view in the markets that the MPC will do hike several more times.

Thursday

BoE day – after the rise in core inflation and signs of a wage-price spiral, the Monetary Policy Committee is assured to raise rates. The question is more about the guidance they provide and the tone – the BoE has been loath to sound very hawkish at any stage of the hiking cycle and may continue to think inflation is going to come down due to lagged effects of hikes already carried out. After hiking in May, the Bank seemed comfortable with the asymmetry of the situation – inflation quick to go up, but slow to cool.

Friday

It’s PMI day with flash manufacturing and services reports from France, Germany, the Eurozone, UK and US all in focus. A month ago the surveys showed US business activity increased to a 13-month high in May, with strong growth in the services sector. It was a different story in Europe though as the flash composite PMI declined to a three-month low as a steepening factory downturn offset services growth. UK activity looked good but betrayed inflation pressures.