The latest consumer price inflation report here is going to make the BOE's job this week extremely tough. Policymakers were hoping to keep up the narrative that we have seen a peak in UK inflation but a surprisingly higher reading, in which the headline came back up to double-digits, will invalidate any of that talk.
As the economy starts to run itself into the ground and financial conditions are being strained, the BOE had hoped to raise the bank rate by 25 bps this month and then perhaps head to the sidelines. The data today will make it really difficult to have to make that choice as the BOE has to balance between the battle against inflation and financial/economic stability.
Despite energy prices having come down considerably, the worry for the UK economy is that the cost-of-living crisis is still resonating throughout the economy. Food prices continue to soar based on the latest report above and that won't make it easy for households as high price pressures continue to grip at their capacity to spend:
Looking over to market pricing, we can see that the implied odds for the tightening cycle suggests that the BOE only has one more rate hike to go. As things stand, there is roughly a total of 1.5 rate hikes priced in at the moment:
And despite the hotter inflation data, I don't expect those odds to change that much ahead of the Thursday decision.
There have already been some policymakers voting to hit the pause button and the BOE themselves have hinted that their terminal rate may not be as high as what markets were thinking at the start of the year. And all of this is before the turn in the rates market over the last two weeks.
It'll definitely set up for an interesting policy meeting this week as the central bank has to walk an extremely thin tightrope in not only managing market expectations, but sending the right message that they can do what it takes to get the economy back on track.
Otherwise, the optics would just seem terrible if they fail to get things back in line. It would play out in a way that they were:
- Too late in tightening policy aggressively when inflation was already running away
- Even in tightening, they appear to be doing too little to address inflation
- Now that they want to back down, they haven't really solved anything with their rate hikes
Disaster in the making?