Near-term Risk of More Hawkish Pricing

Overview

This is our summary of recent comments from BoE MPC members, and an overview of the timely data we are looking at, to determine the path ahead for policy.

Go to: Recent Voter Comments ǀ Stress, Surveys and Data

Current BoE Forecasts

Link to Most Recent BoE Meeting Minutes

Some Hawkish Surprises

Last week provided some more hawkish data to the BoE mix than we had anticipated. The Autumn Statement will support the near-term GDP situation more than we had expected, and more than was baked into the BoE’s November MPR (Chart 1).

Meanwhile, although the beat in October inflation last week was partly down to formula reasons, it showed that food price momentum remains strong, and the headline-grabbing ‘inflation peak’ has yet to come. While Education, Housing and Clothing significantly beat average monthly rates, their outturns were either seasonal or expected (energy price cap and October education changes). Other components were far more benign (Chart 2).

The first signs of labour market slowdown are an offset to the hawkish surprises above. Employment is now in MoM decline (Chart 3). Meanwhile in wage growth, from the more timely HMRC PAYE data, shows that there may be declines ahead. October’s PAYE October data had its largest monthly drop in median income since mid-2018 (ex-COVID period). The offset is that this came after a big rise in September. Given lags to official data, it is unclear when this will hit (Chart 4). Still, base-effects mean such a slowdown would have a large YoY effect.

Speakers Continue to Lean Towards Dovishness

Highlights from speakers included Tenreyro calling for a pause at 3%. We expect Dhingra is probably in the same camp given her vote for 25bp, and her comments that tightening too much is a risk. Meanwhile, the hawks’ calls for front-loading remain, although they have lost some of their urgency. Mann is still firmly focused on inflation expectations and the currency as her rationale for hawkishness. Ramsden has mentioned currency, too, while Haskel is focused on the labour market. Of these, the currency argument is weak. In the last two months GBP has halved its YTD weakness to 5% and sits close to the middle of its post-Brexit range. Meanwhile, it is interesting to note that CHAPS data (timely credit and debit card spend data), which Ramsden has previously backed, continues to look relatively subdued YoY (Chart 5).

Of the three pillars of hawkishness we previously identified: inflation expectations continue to re-anchor (see: appendix), and the labour market is now beginning to turn. It is only from fiscal policy that the rationale for more hiking has grown, and even there the effect beyond the first year is relatively small (Chart 1).

Meanwhile, the more neutral voices do not seem to be gearing up for further 75bp moves. Bailey has emphasised that he did not push back against the markets lightly. Mortgage rates remain an issue for him. For now they remain relatively elevated. Broadbent has highlighted uncertainty around the duration of a recession.Meanwhile, Pill has set out the need for further action, but is now considering what level to stop at.

Near-term Risk to Pricing for Dovish Tilt

Despite the hawkish CPI print and the fact that fiscal policy will be more supportive for growth than anticipated, the market pricing for BoE hikes has remains relatively capped (Chart 8). At this stage this seems to have a lot to do with the recent shift in pricing towards Fed dovishness. We do not think that this pricing is credible. This week presenting a lot of opportunities for Fed speakers to talk up the terminal rate, so there is reason to expect the pricing will fade (Chart 9).

As this dovish Fed pricing fades, there is a strong risk of a feed-through into BoE pricing. Ultimately, to keep mortgage rates from tearing higher, the BoE will need to push back on this, but in the near-term the risk of a rise in BoE terminal pricing is high. Further out, we retain the view that around 4% terminal rate seems sensible to us.

Recent Voter Comments

Stress, Surveys and Economic Data

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.)