The Bank of England is expected to keep the Bank Rate unchanged at 3.75% today with one or two hawkish dissenters. At the last meeting, the BoE delivered a hawkish hold with unanimous decision to leave rates unchanged and the removal of the easing bias. Moreover, in the minutes, policymakers made it clear that they are focused on the risk of second-round effects with several members willing to hike rates if needed.
Going into this meeting, the economic data hasn’t been screaming for urgent hikes. All in all, it wasn’t a bad report but not good either.
The problem is that these are lagging data points and the more timely ones like the S&P Global PMIs disclosed a more concerning picture. The survey showed an acceleration in economic activity in April alongside a record-breaking surge in business costs. The agency noted though that “the improved rate of expansion is in part a reflection of a short-term boost from a rush to secure purchases ahead of feared price rises and supply shortages linked to the war”.
The bad news is that businesses across both the manufacturing and services sectors reported the steepest rise in average cost burdens in more than three years, with some measures of input price inflation reaching their highest levels since the survey began nearly three decades ago. The agency noted that “prices are rising not just because of surging energy costs, but also due to increases in charges levied for a wide variety of goods and services, with price hikes often stoked by supply concerns”. Businesses cited also strong wage pressures.
The surge in costs, driven primarily by energy price shocks and mounting wage pressures, suggests that inflationary pressures could become more entrenched forcing the BoE to retighten policy to avoid erasing the progress achieved since 2022.
Given that they already basically adopted a hawkish bias in the prior meeting and the more timely data is pointing towards heightened inflation risk, the BoE might signal a rate hike for June.
The market is pricing in just 63% probability of a rate hike in June, so there’s still some room for the GBP to appreciate on the back of a hawkish BoE. That would also weigh on the FTSE 100.
A surprise hike today would trigger a bigger move in the GBP and weigh more heavily on the FTSE 100. I would exclude any type of dovish tone for today’s meeting, so in my opinion, the risks are skewed towards the upside for the GBP and downside for the FTSE 100, with the stock market being more vulnerable
