BoE React: Hawkish MPR, December Labour Market Data Vital

Summary

• The MPC kept bank rate unchanged at 5.25% as expected, with fewer voters backing a hike than in August.
• However, the updated MPR was more hawkish than we had anticipated. The BoE continues to expect the labour market loosening to be relatively contained. ONS LFS data issues may be playing into these feelings.
• December’s ONS data update/correction is the most important release before the next meeting. We expect it will confirm that the BoE’s profile is too hawkish.
• The inflation profile is relatively higher than it was into 2024. This seems to be on the back of ONS AWE data beats, despite the credibility of these being somewhat suspect.
• October inflation should drop sharply, although rental inflation may sap the effect slightly. We would look through rental inflation and look instead for signs that accommodation inflation is normalising.

Market Implications

• The market does not seem to be buying the BoE’s apparent hawkishness. Expect this feeling will continue ahead.
• We continue to like to receive near-term SONIA/be long near-term SONIA futures.
• We like to play the calendar box spread of SONIA and SOFR Mar24/Mar25 (long SFRH4H5, short SFIH4H5)
• We also still like 2s10s GBP steepeners vs EUR.

A Hawkish BoE Pause – December Labour Data Will be Key

The BoE kept bank rate steady at 5.25% as expected, with just three voters backing a hike (down from four at the previous meeting).

However, the dovishness pretty much stopped there. We had expected a dovish monetary policy report (MPR) on the back of the recent undershoot in inflation and the continued weakening in the labour market.

What we got instead was a much more hawkish outlook, supported by an upward revision to wage growth into the end of the year.

The presser meanwhile revealed a number of key elements:

• The BoE is not looking for cuts any time soon.
• The labour market loosened more than they expected, but they are re-assessing the data to try and parse whether some of the employment weakness may be supply, not demand driven.
• Wage growth remains a major concern for them.
• Despite assertions that they are not “flying blind” without updated ONS labour market numbers, their continued use of the AWE data suggests their outlook will be highly exposed to the ONS December revisions.

Despite the more hawkish tone, we continue to like to position for a more dovish BoE outlook. The market reaction post-meeting suggests that the market is not entirely convinced by the BoE’s apparent hawkishness. Expect this will continue as we get new data.

On this basis, we continue to see value receiving near-term SONIA/be long near-term SONIA futures, positioning for 2s10s GBP steepeners vs EUR, playing the calendar box spread of SONIA and SOFR Mar24/Mar25 (long SFRH4H5, short SFIH4H5).

The Details of the MPR Are Hawkish

Wage Growth Forecast Revised Higher, Same Old Unemployment Trajectory

Despite uncertainty around ONS labour force data, the MPC continue to consider the average weekly earnings data (AWE) as the main guide to earnings.

As such, they have revised their YE YoY expectations for regular private pay growth 1ppt higher to 7.2% YoY. This is despite the fact that other surveys have come in lower (Chart 1).

From the press conference, the BoE focused on the absolute level, rather than which numbers they are watching: i.e. whether the number is 8% or 7%, it’s still too high.

Scepticism on the ONS’s numbers seems to have been reserved for the more dovish unemployment numbers.

The BoE’s updated profile for unemployment is pretty uninspired – close to a parallel upward shift versus August (Chart 2).

The delay in the labour force survey (LFS) data (on the back of poor response rates) does cast doubt on the effectiveness of the numbers, but the direction of travel has largely agreed with alternative survey data (Chart 3).

The BoE’s own estimates of LFS unemployment adjusted for population size changes result in just a 0.2ppt decline in unemployment rate versus that reported – in other words taking the IFO unemployment to 4.1%, leaving their own trajectory still very shallow.

The ONS’s updated, improved data series release on 12 December will be critically important. My expectation remains that labour market loosening will continue faster than the BoE is assuming.

Inflation Revised Higher – BoE Sounds Overly Concerned on Services CPI

Despite recent misses in inflation, and the rise in unemployment trajectory, the MPC has revised up its estimates for inflation across much of the profile, in contrast to our expectations (Chart 4).

In the near-term, to the end of the year, the MPR’s monthly forecasts are slightly lower, with reduced food and goods inflation slightly tempered by less deflation in fuels inflation (Chart 5). Services inflation outlook remains roughly unchanged, although the longer time horizon shows a concerted uptick in January YoY on base effects.

The rise further out in the forecast is likely to be lifted by higher wages growth and higher energy prices. Given BoE wage forecasts, services inflation is set to remain the main driver of inflation.

Within services, the BoE has constructed an index omitting the volatile elements of airfares and accommodation. In our view, this is less informative on the effect of wage cost pressures as it will still be driven by more idiosyncratic sectors such as rent (we prefer to consider wage-intensive services inflation). The BoE’s component suggests a more stable, strong inflation momentum picture than if they were to omit rents also (Chart 6).

We expect ahead, services inflation (ex rents) will continue to re-anchor and the BoE’s fears of sticky inflation will prove unfounded. The near-term risk is that October tends to see rental re-pricings, which could send it another leg higher.

Henry Occleston is a Strategist, who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)