Soaring Inflation May Boost BOE Rate-Hike Warning This Week

(Bloomberg) -- Bank of England Governor Mark Carney may now have what he needs to convince the market that a rate increase will come sooner rather than later.

After failing to shift investors’ rate view in August, the renewed inflation pickup matching the fastest in four years could give the BOE’s warning more credibility if policy makers say markets are still are underpricing future hikes. The odds on higher borrowing costs jumped after the consumer-price figures on Tuesday.

That’s a sharp contrast from the money-market reaction after the central bank’s decision six weeks ago. At that time, warnings about Brexit and a downgrade to growth forecasts overshadowed Carney’s assessment that policy may need to be tightened by a “somewhat greater extent” than investors anticipate.

Traders largely ignored his attempts to steer them and pushed back bets on the BOE’s first interest rate hike. The pound also went downhill, losing more than 2 percent last month.

On Tuesday, sterling jumped as much as 1 percent to reach its strongest against the dollar in a year. The odds on a rate hike by February 2018 rose to 51 percent from 44 percent on Monday.

Since the Monetary Policy Committee’s last forecasts, the economy has performed broadly as the central bank expected. There have been tentative signs of a long-awaited pickup in wage growth, with the government announcing on Tuesday that a cap on public-sector pay rises in place since 2011 is to be eased. 

Figures published Wednesday are likely to show a continuation of the subdued trend in wages for private employers. The inflation rate in August jumped to 2.9 percent, well above the central bank’s 2 percent target and higher than officials forecast.

Hike Supporters

Economists expect Michael Saunders and Ian McCafferty to maintain their votes for a rate increase, and the committee could ramp up its rhetoric on future policy changes at this week’s scheduled decision. 

Andy Haldane, usually on the dovish end of the panel, said in June that “withdrawing some of the incremental stimulus provided last August would be prudent moving into the second half of the year” and that the risks of leaving policy tightening too late are rising.

“We would not rule out a somewhat hawkish line from the MPC’s policy statement this Thursday, in a bid to push market rate expectations up,” said Chris Hare, an economist at HSBC. “It’s not impossible” that Haldane joins the hawks.

For some economists, though, the uncertainties surrounding the Brexit process are too threatening for the BOE to change track. 

“With the MPC facing many ‘imponderables’ related to Brexit negotiations, and progress on the first stage of Brexit negotiations painfully slow, the committee is likely to continue to err on the side of caution,” said Daniel Vernazza, an economist at Unicredit Bank AG.

--With assistance from David Goodman Anooja Debnath and Lucy Meakin

To contact the reporter on this story: Jill Ward in London at jward98@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Brian Swint, Andrew Atkinson