The Bank of England rate decision is set to be even more contentious later today, following the release of another higher-than-expected CPI inflation report from the UK this week.
Several Banks are out with their take on what the UK central bank is going to do at the one meeting and indeed the possibility that the Bank of England hiking.
Major investment bank Nomura say that they expect a 25-basis points rate increase from the Bank today, followed by additional rate increases in August and September.
Nomura also say there was a chance the Bank was going to do nothing in June, but that evaporated due to last week’s positive labour market report, which also heightened the risk of a 50-basis point hike.
They also note that it is possible that the MPC will make statements concerning policy transmission delays or more direct statements indicating that the majority of the MPC’s work has been completed in an effort to wiggle down market pricing.
MUFG also discusses the possibility of a more aggressive monetary policy tightening by the Bank of England (BoE) in response to a concerning inflation print in the United Kingdom.
The bank notes that the BoE faces a dilemma. On one hand, the high inflation print might warrant a more aggressive interest rate hike, possibly 50 basis points (bps), to curb inflation.
On the other hand, a sudden and aggressive rate hike could be perceived as the BoE acting in panic and as an admission that it is losing control over inflation. This might have adverse effects on market confidence.
In summary, MUFG sees the possibility of a more aggressive rate hike by the BoE in response to surging inflation in the UK but acknowledges that the BoE is in a difficult position.
The response of the GBP will be influenced not only by the magnitude of the rate hike but also by perceptions regarding the BoE’s handling of the inflation situation.