Last week, the major surprise was that the Bank of England committee voted not to hike by 5-4. Governor Bailey was the casting vote and decided on no rate hike. This follows 14 consecutive rate hikes that started at the end of 2021. This outcome had become a close call following the inflation data for August, which showed a further fall to 6.7%, from 6.8% in July. The MPC were also aware of the weak September PMI data which showed a further fall into deeper contraction at 46.8, released on Friday.
The Bank of England stuck to its forward guidance that further tightening may be required if there is evidence of more persistent inflation. This leaves the door open to further interest rate hikes. The question around interest rates is becoming how long the rates will remain at this level and when and by how much rates will eventually come down. Given the PMI data suggesting potential negative growth in the third quarter, markets will be sensitive to further signs of weakness in the economy.
This week, we have rather less to digest, with BoE money and credit data including mortgage approvals, along with the ONS GDP data. This will provide updates from 2021 and may provide some interesting data and forecasts for the Monetary Policy Committee to asses at their next policy meeting. Sterling fell to a six-month low against the US dollar after the BoE meeting and has continued to look soft, hitting new lows.
GBPUSD – 1.2145
GBPEUR – 1.1501
It was a busy week last week for central banks, across Europe as well. As expected, Sweden’s Riksbank and Norges Bank both hiked rates by 0.25%. The Swiss National Bank surprised markets, before the Bank of England, in leaving interest rates unchanged at 1.75%. They suggested that the tightening done so far is countering inflation, but didn’t rule out further hikes if inflation rises further.
This week, the September Eurozone flash CPI estimate will be closely watched with the expectation that headline CPI will fall sharply to 4.5%. This would be the lowest for nearly two years and is likely to have been a result of lower food prices and services prices. This inflation report is likely to add to expectations that ECB interest rates have peaked with markets then waiting to see how long rates will remain at the current level.
EURUSD – 1.0560
EURGBP – 0.8695
The Fed paused on rate hikes again, for the second time this year. Markets still believe that the Fed may have one more hike left to come in 2023, partially driven by the ‘dot plot’ of Fed members’ expectations. The dot plot also showed a reduction in expectations of rate cuts in 2024. Interest rates are now expected to end 2024 at 5.00-5.25% compared with the previous 4.50-4.75% forecasts.
Markets will now focus on the upcoming GDP growth and inflation numbers, to determine whether the economy is sufficiently strong to warrant a further rate hike. The impact of the United Auto Workers strike and a potential US government shutdown could also have an impact. Second quarter GDP tomorrow might be revised up slightly to 2.2%. So far, it looks like third-quarter growth will be stronger. Personal spending is also expected to rise around 1% in August, whilst the PCE deflation is likely to show inflation rising in August due to energy price increases.
GBPUSD – 1.2145
EURUSD – 1.1560
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*Interbank rates are correct at 7am on the date of publishing.