Will The UK Raise Rates Today?

With the FOMC meeting out of the way, and no surprises from Powell and co., our attention shifts to the Bank of England (BoE). Today’s Quarterly Inflation Report is particularly interesting, given a range of potentially market-moving dynamics are in play.

Since the BoE’s decision to stand pat in May, Analysts have been resolute in its view that the MPC would raise rates by 25bp in August (aligned to our expectation of a strong Q2 data docket). This is set to be the case, with the market assigning a 90% chance to policymakers voting to raise the Bank rate. We expect the vote to be 7-2.

The BoE’s latest quarterly economic forecasts are expected to be broadly unchanged from May’s Inflation Report, but rate-setters will be more confident that the economy is evolving in line with their central projections. That said, the risks of revisions to the growth and inflation outlooks are skewed to the upside.

Inflation projections risk being nudged modestly higher, due in part to recent movements in the oil price and exchange rate.

This may result in inflation being seen to remain above target beyond mid-2020, which could argue for a steeper path of policy tightening.

The Bank is also expected to provide additional forward guidance on where it sees ‘neutral’ interest rates – the level consistent with full employment and stable inflation – over the medium term. We expect a range estimate of around 2.00-2.50% (nominal) / 0.00%-0.50% (real).

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