BOE Set to Keep Powder Dry as Oil Prices Swing: Decision Guide

1{ywp10d02699)dbg5r{zgqm_media_dl_1.png Office for National Statistics

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(Bloomberg) — The Bank of England is set to leave interest rates on hold as it sticks to a wait-and-see approach to navigate the wild swings in oil and gas prices.

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Investors and economists expect the Monetary Policy Committee to keep the benchmark cost of borrowing at 3.75% on Thursday with the inflation outlook still hinging on the outcome of the Middle East conflict. A new set of forecasts will be published alongside the decision at 12 p.m. London time. Governor Andrew Bailey will hold a press conference an hour later.

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While recent data has pointed to domestic inflation pressures easing, oil and gas prices are higher than when officials last met in June with the US and Iran once again trading strikes after a recent pause in hostilities.

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Still, a majority of economists polled by Bloomberg expect only two of the nine-member MPC to call for an immediate rate rise. A tightening of financial conditions since the war broke out has bought officials time. However, they are likely to keep the option of increasing borrowing costs on the table.

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The BOE is also expected to publish its latest analysis on quantitative tightening ahead of a decision on unwinding its portfolio of government debt in September.

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Vote split 

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The majority on the MPC are expected to back keeping rates on hold as they balance the threat from inflation against slowing growth and weak demand for workers. For now, they believe the tepid economic backdrop combined with higher real-world borrowing costs is containing the risk that workers seek bigger pay raises and companies bump up prices.

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Hawkish rate-setters Chief Economist Huw Pill and Megan Greene are expected to continue their call for higher rates to guard against second-round effects that would keep inflation higher for longer. External rate-setter Catherine Mann is seen as the next most likely to support immediate action.

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While it would be the fifth straight meeting the BOE has left rates unchanged, traders believe a hike will be in play over the autumn. They currently put the odds of a move in September at around 65% and are pricing in almost two quarter-point increases by the end of the year.

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Guidance

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Policymakers will look to keep their options open in their messaging to markets given the uncertainty hanging over their decisions. The current guidance says the panel “stands ready to act” to ensure inflation will return to its 2% target over time, language it has used since the war started. 

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The committee may look to avoid any dovish signals that would lead to an unwinding of bets on hikes given officials believe this tightening in financial conditions is helping them contain inflation. The individual paragraphs setting out the views of each member will be in focus for any signs that key swing voters including Bailey are beginning to edge in a more hawkish direction. 

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“There is little incentive for the MPC to narrow its options just yet,” said Sanjay Raja, chief UK economist at Deutsche Bank. “Retaining the current guidance allows policymakers to respond to either a weaker economy or stickier inflation without prejudging the next move in Bank Rate.”