UK Inflation Eyed
The UK’s October inflation numbers (Wednesday at 7:00 am GMT) will be interesting this week.
The UK has been in the spotlight for longer than I can remember now. Let’s be frank, the economic picture is bleak. Growth is stagnating, with recent September and Q3 GDP numbers coming in lower than expected and showing barely any growth. This reinforced market expectations of further BoE easing and weighed on the GBP. On top of this, inflation, albeit coming in softer than expected for September, remains nearly double the BoE’s inflation target, and the jobs market is cooling.
You may recall that the MPC voted 5-4 in favour of holding the bank rate unchanged at 4.0% earlier this month, which was more dovish than the 6-3 vote expected. Within the 9-member Committee, we now have two clear camps: hawkish and dovish supporters, as I see it, with BoE Governor Andrew Bailey veering on the side of the doves.
Following the BoE’s decision, I noted the following:
‘Bailey now holds the decisive vote. Although he chose to keep rates steady, the BoE Governor recognised that upside risks to inflation have become less pressing since August, siding somewhat with the dovish members. Bailey also said he thinks additional policy easing is likely if disinflation becomes more clearly established in the period ahead.
Between now and the next meeting on 18 December, we will see two more inflation reports, with the second due a day before the meeting. These reports will be crucial to watch. Attention now shifts to the UK Autumn Budget on 26 November, with growing speculation that tax rises are on the menu.
Heading into this week’s CPI data, as per the LSEG calendar below, YY headline and core CPI inflation measures are forecast to ease to 3.6% (from 3.8%) and 3.4% (from 3.5%). However, in light of money markets already pricing in around 20 bps worth of cuts for next month’s meeting, a sizeable miss would be needed to increase rate-cut bets. All it would probably do is see the market full price in a reduction next month.