BOE Set to Hold Rates as Inflation Concerns Mount

The Bank of England (BOE) is expected to hold interest rates steady at its upcoming meeting, making it the only major central bank not to hike in August. The base rate is anticipated to remain at 3.75%. Analysts argue that UK yields are already high, and other central banks have hiked recently - the European Central Bank (ECB) raised its main rate to 2.5% last week.

Recent mortgage rate increases may also influence the BOE's decision. Santander has pulled sub-5% mortgage deals, and Barclays' two-year fixed deal will rise to 4.75%. A rate hike would be unlikely to curb inflation or expectations driven by energy price spikes, over which the BOE has no control.

While some expect a dovish hold, with six committee members voting to keep rates unchanged, others believe a hawkish hold is possible. Andrew Bailey may shift his rhetoric in today's press conference, indicating a potential future rate hike. Interest rate futures markets predict four hikes by the end of next year, with November being increasingly likely.

However, the BOE faces a challenge balancing its inflation mandate with signs of consumer struggle. The labour market is weak, payrolled employment is falling, and wage growth is negative in real terms. Bailey has expressed concerns about fuel prices remaining elevated due to Middle Eastern supply constraints and rising energy costs putting upward pressure on food prices.

The BOE's decision will have implications for the pound. If they signal a future rate hike, it could cause volatility. The bond market is also watching the meeting, particularly for the BOE's balance sheet reduction plan. A slower pace of unwinding its portfolio of Gilts may reduce upward pressure on bond yields.