The Bank of England meeting will be eagerly watched this week. A fourth consecutive rate hike is widely expected by the markets. The BoE’s message will likely be that they need to strike a balance between inflation and growth risks. We expect a further 25bps increase which will take the Base rate to the highest since 2009 at 1%. The May Monetary Policy Report will see an increase in inflation forecasts. This could lead to calls for further and faster rate hikes. We may see a further divergence of views with at least Deputy Governor Cunliffe likely to vote against a hike as in March.
The market is now pricing in six interest rate hikes over the six remaining meetings of the year. This may be excessive given the divergent views on the committee. We may also see the MPC soften its guidance around future hikes further from additional increases in interest rates “might be appropriate”. The BoE’s latest economic projections will include the impact of the war in Ukraine, which will add downside risks to growth. Despite higher near-term inflation forecasts the BoE’s longer-term projections may well be cut. With the latest set of forecasts including higher interest rates, the BoE will probably now project an even bigger undershoot of the inflation target in three years’ time.
Meanwhile, the April CBI retail survey signalled a decline in sales last week. This week, we will see the PMI manufacturing, construction and services numbers, which have been holding up to signify steady growth. Also this week, the outcomes of UK local elections and those for the Northern Ireland assembly will be closely watched as a judgement on Boris Johnson’s government.
GBPEUR – 1.1911
GBPUSD – 1.2515
Whilst the European Central Bank does not join other major central banks this week, there was some talk from officials pointing to the possibility of an early interest rate hike. This would see a move away from the most cautious end of the spectrum. Only the Bank of Japan’s recent policy update showed little intention to tighten monetary policy anytime soon. The Swedish Riksbank was one of the latest central banks to raise interest rates, with a policy U-turn leading to a 25bps hike to 0.25%. This decision was based on an increase in inflation expectations. The Reserve Bank of Australia also raised rates by more than expected 25bps to 0.35% with similar pressures.
The data coming out of Europe continues to be weak with German consumer confidence falling below its pandemic low. Eurozone GDP rose 0.2% in the first quarter, though this is a slowdown and is likely to go further. Eurozone inflation edged up to 7.5% in April, with core inflation rising to 3.5%. This week we will also see whether there are wider signs of slowing activity with manufacturing and services PMIs, unemployment and retail sales figures.
EURUSD – 1.0507
EURGBP – 0.8396
The most important thing for the markets this week is the Federal Reserve rate decision. The Fed remains focused on the risk of high inflation and is expected to raise rates by 0.5% and signal further tightening. This is a fairly aggressive move but, as many Fed policymakers have signalled their support, it would be a surprise if we see anything else. The Fed is also likely to signal several further interest rate hikes.
Comments from several Fed policymakers since the March update suggest they want to move rates up quickly to the perceived ‘neutral’ rate around 2.25-2.50% to quell inflationary pressures. That suggests we will see a further 100bps of rate hikes. The Fed is also likely to confirm that it will reduce its asset purchase holdings.
The labour market report will also give an indication of domestic inflationary risks from strong wage growth in a ‘red hot’ labour market. We will also see a range of other indicators including Factory Orders, ISM manufacturing and services and Construction spending. GDP fell in the first quarter, but faster growth is expected in the second quarter and the data this week will provide further evidence.
GBPUSD – 1.2515
EURUSD – 1.0507
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*Interbank rates correct at 7 am on the date of publishing.