Just a few weeks ago, a 50 basis-point increase seemed like a sure thing, and money markets were signalling 100% certainty in a more aggressive approach to tackle inflation. But now the picture is cloudier. The probability has dropped to 70%, and more strategists are saying 25 basis points would be a better choice.
It’s all because inflation is eating into household incomes and skyrocketing energy costs are set to push more people into poverty. The International Monetary Fund has warned that Britain will have the slowest growth among major industrialised nations next year. In the view of a former BOE official, the UK is probably already in recession.
“The choice for the BOE is to join the viral trend for upsizing, or keep it boring and act with caution into growth headwinds,” said Jamie Searle, strategist at Citigroup Inc. Investors expecting a larger rate hike point to the BOE’s pledge in June to “act forcefully” if it saw persistent inflation. And the data has certainly backed that up, with UK consumer prices rising at the fastest pace in 40 years.
NatWest Markets and Morgan Stanley are among those expecting a 25 basis point increase, which would take the benchmark rate to 1.5%.
“Rising risks of recession ought to caution against overly aggressive policy tightening,” wrote NatWest’s Imogen Bachra, head of UK rates strategy, and Ross Walker, chief UK economist.
Bond prices have rallied for the last three weeks on expectations that the BOE will have to take a softer approach to monetary policy. The yield on 10-year gilts fell 34 basis points to 1.89% in July, the first monthly drop since November 2021.
The two-year bond yield has dropped to about 1.7%, some 60 basis points lower than a June peak.
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