Will BOE Opt for Calm Regardless of CPI?

The last of the "big three" central banks to hold a policy decision, the BOE could take its cues from the Fed, ECB or inflation data the day before.

BOE to Weigh CPI, FOMC and Credit Suisse

A poll conducted by Reuters last week showed that 42 out of 47 economists expected the BOE to hike by a quarter point at the next meeting. But that was before the forced buyout of Credit Suisse and coordinated actions taken by major central banks to enhance liquidity, a sign that they might be worried about the financial system's health. Further tightening would be seen as putting additional stress, especially if the Fed goes through with a rate hike on Wednesday. That balances out with the desire of central banks to separate regulatory issues from monetary policy and convey a sense of calm, which is what the ECB opted for last week.

Recently markets moved to price in 50% chance of a hike by the BOE. But markets are still waiting for the latest UK CPI figures, expected tomorrow, Wednesday. The consensus is that inflation will come down from double digits, but by how much could be pivotal for expectations for the BOE. A sharper-than-anticipated drop in inflation could provide an excuse for the BOE to take a pause, while overperformance in inflation could push the BOE to hike.

Still Last Hike or Further Tightening Ahead?

At the last meeting, the BOE said it was near where it would bring the hiking cycle to a close, which leaves the door open for not hiking at the next meeting. The BOE could offer a "hawkish pause", which is to not hike but convey that further tightening was very likely. Another option would be a "dovish hike", in which the bank goes through with the hike but tries to reassure markets by insisting it will be the last. As usual, how credible that will be will depend on the vote count.

Both the market and the polled economists seem to agree that there will be no more hikes after this meeting. Although since the release of the Spring budget, there seems to be some more optimism that the UK can avoid a recession this year, so cuts further down the road aren't being priced in. Given this convergence of expectations beyond the next meeting, a hike or not could leave the markets without a major reaction.

Pound Continues Impulsively Higher

The British pound has continued to move up since its wedge breakout as it put a low in at $1.2010. Above $1.2166 price action suggests further upside towards $1.2448, given $1.2345 gives way to bulls. If $1.2142 succumbs to bearish pressure, a deeper correction or reversal might be seen. Conversely, $1.2285 might open the door to higher territories.

Key Takeaways

Whether or not the BOE chooses to hike at the upcoming meeting will likely depend on the latest UK CPI figures, what the FOMC will do and whether BOE will opt for calming markets in the aftermath of Credit Suisse. Market expectations suggest this meeting would be the last in the current hiking cycle, although the Spring Budget has given rise to some optimism that the UK can avoid a recession this year.