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The latest inflation data has put more pressure on the BOE to cool down prices, but with talk of the Fed hiking by 75 bps, can the BOE at least muster a 50bps hike?

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Fifth time's the charm

What's nearly certain is that the BOE will once again raise rates at its meeting on Thursday. Up until the weekend, there was a pretty solid consensus that it would be a 25bps hike. But after the inflation data in the US, several analysts are starting to hedge their bets. The consensus is still 25bps, but there is more focus on the rate hike trajectory after that.

We should remember that in the Spring Budget, HM Treasury expected inflation to continue to rise until June. The BOE has a similar assessment. So even though the latest CPI figures are worrying, they are still following the direction that has supported rate hikes over the last four meetings. While money markets price in further rate hikes, expecting rates to reach as much as 2.0% by September (in other words, at least three more hikes over the next two meetings, since the BOE will not meet in July).

How's the vote?

Last time, three members were dissenting on a 25bps hike, wanting more aggressive action. If one more member joins that minority, it would seriously raise speculation of a bigger hike in August.

The other factor is that the BOE still hasn't initiated quantitative tightening, and at the last meeting affirmed its commitment to start unwinding its holdings in September. If that date is moved forward, it could also be another hawkish signal.

On the other hand, even if there is considerable desire to push rates higher and start to head off higher inflation expected through the summer, the last two months of negative GDP growth might sour the appetite for more tightening. The key might be any commentary on where the bank sees ‘neutral rates’ (a theoretical interest rate appropriate to the economy), and whether that is revised higher or lower compared to the last statement.

FTSE gaps lower

The UK 100 index has had a few weeks of sideways price action that has turned more bearish as of last week. As if the bearish engulfing weekly bar wasn’t enough, this week opened with a gap lower. Now, 6760 and 6510 are near-term supports. 

Due to the significance of the 7300 area around the ‘gap’ (two trendlines and the 50-week MA are being crossed), this new bearish momentum could be turning into a full-fledged reversal. This would see the 6k, 5500, and perhaps even 5k recaptured. On the flipside, bullish confidence might be revived if we head back up above 7500.

Key takeaways

The BOE is expected to raise rates by 25bps tomorrow and at least three times over the next two meetings as inflation is expected to keep rising until June. If there is another hawkish dissent among the MPC members, that could be an indication of a double hike in August or September, unless GDP continues to fall.