Monetary Policy & Inflation | Rates | UK
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Summary
- With little new by way of data, we expect the BoE will leave bank rate unchanged at 5.25% once again (6:3 vote), with little change to tone.
- A more substantial change in tone could come in February once we’ve had corrected LFS data and new inflation prints.
- For now, we look through the recent apparent hawkish tone as simply a pushback on the Chief Economist’s previous comments (which added credibility to 2024 cuts).
Market Implications
- We continue to like to receive May 2024-dated SONIA, with the likelihood being that they will be able to cut rates earlier than the market is pricing.
- We take profit on our Feb 2024-dated SONIA receiver now that it has reached within 1bp of target.
No Reason to Change Tone
December in the UK: a great time for strong opinions about the quality of the tree in Trafalgar square and for Christmas puns, but not for updates to the ONS labour force survey methodology. Instead, UK data watchers (including the Bank of England) will have to wait until January for that little present.
Despite what the monetary policy committee (MPC) might claim, the delay leaves them basically flying blind (no Rudolph in sight) on the labour market – the thing to which they have tied their inflation outlooks (except for Haskel, who reckons 8% unemployment is not enough…).
On this basis, I expect next Thursday that the BoE leaves the bank rate unchanged at 5.25% once again, with similar constancy in tone and voting pattern (6:3). The lack of a press conference could make the event somewhat uninteresting. I expect they retain the recent tone: that conditions must stay tight, inflation is coming down (marginally faster than predicted), but wage growth remains too high.
In our view, by the time we get to May, the BoE should have room to cut. We continue to like to receive May 2024 SONIA, and take profit on our Feb 2024 receiver now that it has reached within 1bp of target.
Onus on the ONS
Next week’s ONS labour market data will include the usual wages and vacancy data, but only the experimental unemployment figures (based on claimant count, HMRC PAYE data and the historic trend of self-employment). The experimental data seems of little real value – basically flat-lining unemployment in line with claimant rate, and flatlining employment in line with the PAYE (Chart 1). Even a modestly faster loosening would outshoot the MPR forecasts. At the same time, survey data continues to suggest stronger labour market loosening (Chart 2).
Meanwhile, survey indicators for wage data are pointing towards wage growth undershooting ONS average weekly earnings (AWE) data (Chart 3). Whether that materializes in the ONS number next week is unclear (it has been overshooting for some time).
Updated KPMG/REC survey wage data tomorrow (running at 3% YoY at the last MPR) and Inflation Attitudes surveys (next Thursday) are likely to paint a continued picture of a loosening labour market and undershooting wage growth.
This exacerbates the inflexibility of the BoE. They remain stuck reacting to the official data (as per the last MPR). That leaves them in a position where they are forced to use data that is probably more hawkish (higher wage, less labour market slack) than may actually be the case. While they can question the data (as they have been doing), there will be limited capacity to drastically tack more dovish until the official data shifts.
Hawkish Relative BoE Pricing Looks Misplaced
Without any more recent CPI (next release 20 December) or corrected labour market data to lean on, there is limited room for hawkishness to build either. That is one reason why we believe the recent more hawkish pricing (versus other central banks) is unfounded (Chart 4). We have previously covered this in more, as a brief recap:
- The stronger tone against near-term cuts from internal speakers such as Bailey, Pill and Ramsden is more in response to Pill’s previous comments that suggested cuts could come in 2024.
- External speakers such as Mann and Greene have added little to the conversation, while Haskel’s extremely hawkish take on the relationship between the labour market and inflation (U at 8% being insufficient to bring CPI below 3% in three years) is not a conclusion the most important members will share.
BoE Hawkometer
Recent Policymaker Comments
Appendix Graphs