BoE Hold Sets Stage for November Rate Hike as Inflation Bites

The British Pound's fate is closely tied to the Bank of England's (BoE) monetary policy decision, set to be announced today at noon BST. MUFG's Derek Halpenny believes a hold from the BoE today would still leave a November rate hike on the table. He points out that natural gas prices have surged nearly 100% since July, which will lead to an increased OFGEM utility price cap in January, pushing annual Consumer Price Index (CPI) above 4.0%. This comes after August's CPI reading of 3.1%, exceeding the BoE's forecasted 2.8%.

Halpenny suggests that a hawkish hold from the BoE today would support the Pound by increasing pressure on front-end yields, particularly with the current pricing for back-to-back hikes at 39bps by December. However, he remains cautious about significant upside before the UK budget on October 28th.

Market expectations are currently pricing in only a 2bps hike today, despite the BoE's last meeting being a close 6-3 vote. This could indicate market complacency towards a surprise or pre-emptive hike from the BoE. A hold today would likely not change the overall trajectory of interest rates but could impact the timing and magnitude of future hikes.