A Bank Rate hold with a hawkish undertone
The MPC has kicked the can down the road with its decision to leave Bank Rate at 3.75% today on a 6-3 vote, the outcome expected by markets and ourselves.
As in July, Greene, Mann and Pill backed an immediate 25bp hike to 4.00%, while the rest of the Committee voted to keep Bank Rate unchanged. Separately, the MPC voted unanimously to run the APF gilt portfolio down to zero by September 2034, retaining £120bn to back banknote issuance and unwinding the remaining £368bn at an average of £46bn a year, albeit with active auctions paused until operational details are set out by April.
For now, we retain our prior call for no change in Bank Rate before year-end, though this view is increasingly under pressure from global developments.
Indeed, we think the unchanged vote masks some materially more hawkish communications from the Bank. Since the July meeting, oil and gas prices have risen sharply due to ongoing conflict in the Middle East, with the Committee unsurprisingly highlighting this as a key source of uncertainty. Bank staff now see CPI at around 3¾% in Q4 and slightly above 4% in early 2027, up from 3.2% in July, while Q3 growth is tracking 0.4% against 0.1% previously, offering a more inflationary outlook than envisaged at the last policy meeting.
With this in mind, Governor Bailey, alongside Breeden, Lombardelli, and Ramsden, all indicated that prolonged conflict, combined with rising second-round risks, would likely require tighter policy.
Crucially, the latter two in this group appear to place greater emphasis on conflict persistence alone, suggesting a majority in favour of tighter policy if fighting in the Middle East drags on, even with minimal evidence of domestic inflation spillovers. While we are conscious of overinterpreting a limited set of comments, this nevertheless challenges our current view that, absent signs of second-round impacts emerging, the BoE would be content to stay on hold.
For now, we continue to look for no change on November 5th, a view at odds with market-implied pricing, which puts the probability of a hike at 85%.
Still, we think the evidence supports patience: services inflation is unchanged at 3.4% and down from 4.5% in March, private sector regular pay growth has slowed to 2.9%, DMP wage expectations remain anchored at 3.4%, unemployment sits at 4.9%, and the Bank's Agents now expect food inflation of around 4% at year-end rather than the 6-7% feared in April. Markets have also done much of the tightening already, with the 10Y Gilt yield now sitting at an uncomfortable 5.2%. Accompanied by a Budget on October 28th likely to further squeeze demand, we think the bar for the six holders to abandon their evidence-first stance within six weeks remains high, barring a fresh leg higher in energy prices.
For sterling, today offered little. Cable dipped around a tenth to trade just below 1.34 on the release, before rebounding on more hawkish details. Even so, should November pass without a hike, as we expect, the unwind of current pricing is a clear sterling negative. With an October budget also still to navigate, we see cable risks tilted toward 1.33 and GBPEUR toward 1.16 in the coming weeks.