British Pound: BoE decision keeps November hike risk alive – MUFG

MUFG’s Derek Halpenny highlights that focus shifts to the Bank of England (BoE), where MUFG expects a hold today but sees rising odds of a November rate hike. Surging natural gas prices and an expected OFGEM cap increase are set to push United Kingdom (UK) Consumer Price Index (CPI) above 4.0%, while August CPI already exceeded BoE forecasts. A hawkish hold could support the Pound, though MUFG doubts significant upside before the UK budget.

BoE hold seen, November hike risk

"Attention now will quickly shift to the BoE monetary policy announcement today at 12 noon (BST). We have written a preview (here) posing the very valid question – how long can the BoE hold out before hiking? We believe the BoE will hold out today but the key takeaways from today will point to the increased prospect of a rate hike in November."

"It is likely to prove increasingly difficult to ignore the developments in energy markets and in particular in natural gas prices with the front future price now up nearly 100% since the start of July. That will translate into a hefty OFGEM utility price cap increase in January that will see annual CPI hit over 4.0%. YoY CPI for August was confirmed at 3.1% yesterday which was above the 2.8% expected by the BoE."

"We expect the BoE to hold today but we would also add that we hold that view with a little less conviction than implied by financial market pricing. Just 2bps of hikes are priced for today and when you consider the last meeting was a 6-3 vote and it would no surprise to see a 5-4 vote today, the market appears a little complacent to a surprise, pre-emptive hike."

"A hawkish hold that tees up a November hike should put some modest upward pressure on front-end yields as back-to-back hikes get better priced (currently 39bps by Dec). That will help support the pound although we remain sceptical of upside scope of any notable magnitude ahead of the UK budget on 28th October."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)