**As seen in Risk In The Week report 09/15/23, subscribe at cablefxm.co.uk/reports
Back in early August, the BoE lifted the Bank Rate by 25bps to 5.25%, in line with estimates. The vote was a three-way split, as some bankers were inclined to a 1/2 % point increase, while one MPC member voted to keep rates unchanged. The BoE said it will keep policy at a restrictive level for ‘sufficiently long’ and maintained its guidance that rates would need to rise if inflation remains persistent. On the announcement, money markets saw a trimming of hawkish bets, which sent the peak rate pricing below 5.75%. Economists believe the BoE is too optimistic on its inflation forecasts, as we mentioned above, the median projection expects price to accelerate faster than the central bank’s forecast for both 2023 and 2024. While July services inflation continues to accelerate, the MPC will have a more recent data point as August CPI will be released one day before the decision. Also, activity has undershot estimates, the latest monthly GDP figure showed the economy contracting by 0.5% on the month vs the median survey of -0.2%. The desk at Nomura said market pricing was looking too aggressive, as it expects one or two more BoE rate hikes. They also flagged that disinflation will be strong in the U.K. as PPI and surveys point softer. Deutsche Bank analysts penciled the BoE to vote 8-1 for a rate hike in September and warned that a change in forward guidance is likely. Deutsche said that the pace of QT is likely to accelerate and see the BoE selling tenors evenly across the balance sheet basket. Finally, their conviction for another rate hike in November has diminished, having said that, Deutsche Bank thinks 5.75% could mark the peak of the BoE hiking cycle.
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