GBP – Bank of England likely to hike rates by 0.25% to 5.5%

The announcement by the Bank of England will be the key focus in the UK.  Most people expect the BoE to hike rates by a further 0.25% to 5.50%.  This will be the 15th meeting in a row that rates have increased.  This comes despite recent data showing a softening in the economy, including last week’s -0.5% GDP growth in July.  The unemployment rate also rose and employment declined. The Bank of England seems to be focused on inflation which remains above target, with wages still rising. 

Ahead of the BoE decision, we will see the latest inflation update. We expect headline inflation to rise to 7% from 6.8% in July due to the recent energy rises.  The core CPI reading is more likely to have edged lower to 6.8% from 6.9%.  We also expect the PMI data for manufacturing and services to have fallen again in September. The falls in August took both indices lower, with a large fall in services.  The composite index now shows falling activity (below 50) and a further reading at this level will increase concerns about the slowdown in the wider economy.

Given the mixed data, what was seen as a certainty with the Bank of England raising rates is now around a 70% probability.  The vote is unlikely to be unanimous with BoE member Dhingra expected to vote for no change while the hawkish Catherine Mann may vote for a 0.5% hike. Markets now see rates potentially peaking so the BoE’s forward guidance will be watched closely. Rates may peak at a lower level than previously expected, but they may remain elevated for longer.

GBPUSD – 1.2379

GBPEUR – 1.1592

EUR – ECB hike by 0.25% to 4% but may now pause

Last week, the European Central Bank gave its latest interest rate decision. They raised rates by 0.25% to 4%.  The rise came despite recent signs that economic activity is faltering.  The ECB cited higher near-term inflation forecasts due to the recent increase in energy prices.  ECB President Lagarde hinted that this may be the last rise in this sequence. She did however emphasise that interest rates may stay at these levels for some time.

This week, the Eurozone PMI data will give some indication of whether activity continues to weaken.  Across Europe and further afield, there are four other major economy central banks that will make rate decisions this week.  The Swiss, Swedish and Norwegian central banks are all expected to hike by 0.25% (to 2%, 4% and 4.25% respectively).  The Japanese central bank is expected to continue to leave rates as they are, despite higher inflation. 

EURUSD – 1.0679

EURGBP – 0.8627

USD – Federal Reserve to pause again even as inflation rises

In contrast to the other central banks, the Federal Reserve is expected to leave its interest rates unchanged tomorrow.  This will be the second pause of the year.  It will be interesting to see whether the Fed provides any further guidance on future expected rate changes.  As with other central banks, the recent suggestion is that although rates may have peaked, they may remain at these levels for an extended period.  The updates to Fed forecasts will provide further input along with the press conference that follows the decision.

Fed Chair Powell is likely to be that the Fed is winning the war on inflation, but there are still risks as we saw from last week’s increase in headline inflation. He will likely leave the door open for further rate hikes and may suggest that they will not fall anytime soon.  The new set of dot plot projections may still suggest one further rate hike is forecast for this year.  The previous dot plot also suggested that rates would be cut around 1% next year and that may change or have further caveats from policymakers. 

Although inflation rose from 3.2% to 3.7% last week, the core rate fell back to 4.3% from 4.7%.  Retail sales rose by 0.6% in August although core sales were only up 0.1%.  This week, existing home sales and the manufacturing and services PMIs will give a further update on the economy after the Fed decision.  The dollar has generally been stronger with hints of the economy remaining resilient. 

GBPUSD – 1.2379

GBPEUR – 1.1592

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*Interbank rates are correct at 7am on the date of publishing.