Following Feder as expected rate hike 75 basis points, what attracted market attention next is whether the Bank of England, which is at the center of the storm recently, will follow closely and raise 75 basis points simultaneously?
On Thursday, November 3, Beijing time, the Bank of England will announce the interest rate resolution, and then at 20:30, the Bank of England Governor Bailey will hold a press conference on monetary policy.
Currently, the general consensus between Wall Street and the market is that as the UK's inflation rose by 10.1% year-on-year in September, returning to its highest level in 40 years, is expected to raise interest rates by 75 basis points this time, refreshing the largest single interest rate hike since 1989, raising the interest rate level to 3%, and raising the main loan interest rate for the eighth consecutive time. This rate hike of 75 basis points has been fully priced by the money market.
But economists said that although the Bank of England may adopt a significant rate hike this time, given the prospects of the recession and major changes in fiscal policy, the hawkish stance shown by the Bank of England when looking forward to the future may be less than market expectations, and may even show a dovish attitude.
As the new Prime Minister Sunak canceled former Prime Minister Tras' controversial "mini budget" tax cuts, this means that fiscal policy and monetary policy are no longer contrary to each other. The Bank of England Policy Committee may not need to consider too much the additional impact of fiscal policy on high inflation, and will pay more attention to the possibility of a slowdown in the UK in the future.
It is worth noting that some Wall Street institutions also said that considering the increase in inflation fluctuations and the acceleration of "wage-inflation" spiral upward, the Bank of England's monetary policy may exceed the previous preset path, and will further tighten the policy and raise interest rates in advance.
hike 75 basis points "Arrow on the string"
Among the 45 economists surveyed by Bloomberg, most of them expect a 75 basis points rate hike this time. Three of them are expected to raise interest rates by 100 basis points, while three are expected to raise interest rates by 50 basis points.
HSBC predicts in its research report released on October 25 that the Bank of England will raise interest rates by 75 basis points and may send a "stronger" signal of further tightening than August.
The reason first includes the energy assistance program that "survives" in the recent major fiscal policy changes and will continue until April 2023, which is expected to cost £60 billion.
followed by trade weighted pound has fallen nearly 2.7% since early August , which has also become a key reason to help the Bank of England maintain a radical stance. The continued tightening of the job market has also laid the foundation for a significant interest rate hike in the UK. The UK unemployment rate has dropped to 3.5% in the three months ending August, a new low since the 1970s, compared with the Bank of England's third-quarter forecast of 3.7%.
The last and most critical point is, , that is, the inflation data in September unexpectedly rose, and core CPI growth rate in February month-on-month is still far higher than the average level , reflecting that the potential inflation momentum does not seem to weaken.
HSBC believes that after the superposition of various factors, it is not surprising that the UK will show a more hawkish attitude. As Bank of England Governor Bailey expressed in a speech on October 15:
Inflation pressure will be stronger than we expected in August.
HSBC also explained in its research report why the interest rate hike was 75 basis points instead of 100 basis points. On the one hand, the uncertainty of current fiscal policy may prevent members of the Bank of England's Monetary Policy Committee (MPC) from taking too radical actions. On the other hand, the interest rate hike was slightly higher than the current market pricing.
will next turn to looseness or continue to tighten? Wall Street has different views
Although Wall Street has basically reached a consensus on the Bank of England's 75 basis points this time, there are still some differences between different institutions regarding its subsequent position.
According to HSBC , the Bank of England may again lower the market's interest rate expectation tonight. The current market expects the interest rate level to rise to 5% next year.
Previously, in August, the Bank of England had said that this expectation was too high against the market's view that the benchmark interest rate would climb to 3%.HSBC believes that the major fiscal policy shifts that have occurred since then may lower the central bank's future inflation expectations and further lower the interest rate outlook, and the Bank of England may not take a tough stance as market expectations.
plus previously, the Bank of England deputy governor Ben Broadbent, also questioned whether the market needs to adjust its expectations for the Bank of England to raise interest rates to 5% next year, so HSBC said it expects interest rates to rise to 4.25% by March next year.
But Barclays' attitude towards next year's interest rate level is more relaxed.
Barclays said in its financial report released on October 27 that although considering strong inflation and some fiscal easing policies (energy assistance program), the Bank of England is expected to raise interest rates significantly by 75 basis points this time. However, the reason for further interest rate hikes after November is not clear, so Barclays believes that the Bank of England will only raise interest rates once again, that is, raise interest rates by 50 basis points in December, and then maintain the interest rate at 3.5%.
As mentioned earlier, when the UK government's fiscal policy takes a 180-degree turn, the Bank of England's monetary policy position will also change accordingly. In this regard, Morgan Stanley British economist Bruna Skarica said:
The more austerity measures implemented through fiscal channels, the less necessary the Bank of England's interest rate hikes. But Barclays also stressed that the Bank of England may also choose to tighten monetary policy "gradually and moderately" to ensure inflation can return to a level close to 2%.
In contrast, Deutsche Bank 's expectations are relatively "hard".
Deutsche Bank believes in its research report last Friday that the Bank of England will not only raise interest rates by 75 basis points this time, but 's statement tonight will also exceed the previous preset path. Specifically, MPC will convey three key messages to the market:
firstly, the UK's economic outlook will further deteriorate, and the economic recession is facing "deeper and longer lasting" than previously expected. Price pressure may intensify in the short term, and then plummet at the end of 2025.
Secondly, monetary policy may exceed the preset path. In this regard, Sanjay Raja, chief British economist at Deutsche Bank, believes that the policy direction of
will be different from the preset path. (Bank of England) will further tighten the policy and raise interest rates in advance, considering that risk management and inflation are more volatile (the energy aid program will end in March next year), and the growth rate of wages and prices will accelerate in the next year.
monetary policy will go further than expected and further enter the "restrictive" field, especially in the context of a decline in inflation expectations.
But Raja also stressed that monetary policy tightening is limited. If the interest rate level reaches 5%, it will make households and businesses already under heavy pressure "injury":
We expect MPC (including the governor) to emphasize at the press conference that although the central bank is working hard to fight high inflation, it is still working to avoid excessive corrections to interest rates, otherwise this will cause the economy to further move away from previous expectations.
Deutsche Bank currently expects that by to May next year, the bank interest rate will reach 4.5%, lower than the previous expectation of 4.75%.
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