Inflation pressures building

Core CPI on Wednesday last week came in at 2% vs 1.5% y/y expected. That is the BoE’s target. Now we know by now that when you say ‘high inflation’ you reply, ‘transitory’. However, the spike higher does not hurt the expectations for bond tapering at today’s meeting.

House prices rising

Andy Haldane said that the UK housing sector was ‘on fire’. In fact, the UK’s Nationwide house-price index has printed a 1.8% increase in May on top of the 2.1% jump in April. The yearly rate has sped up to 10.9% year over year vs 7.1% in April and 6.4% in April. A hot property market can be cooled by simply rising interest rates. Bond tapering would be the first sign that higher rates are coming and the UK’s hot housing market could be enough for the BoE to want to alter interest rate projections (e.g bring interest rate hikes forward).

Logical progression

The last two BoE meetings have been optimistic. It simply makes sense that the optimism translates into action with Andy Haldane recently saying that the UK economy is going ‘gang busters’.

Further UK lockdown easing due in July

Lockdown restrictions ease further on July 19. That gives time for the economy to get going before the UK job furlough schemes ends in September. The job market should be pretty stable with 6 weeks run in to get business up to speed.

SONIA futures pricing in rate hikes

The sharp move lower in SONIA futures shows that investors have been nervous after the last Fed meeting and sooner interest rates may be feared out of the UK. If the BoE brings forward interest rate hikes then the GBP could see some strength out of the meeting. If Asset purchases are reduced expect the strength to last and any interest rate hikes will also see prolonged GBP strength.

Weak seasonals on the GBPJPY pair

The seasonals for the GBPJPY are weak, but the BoE policy will trump any weak seasonals. However, if the BoE disappoints then the downside is worth considering depending on the monetary policy statement.

Leaving MPC members

Remember too that Andy Haldane and Vlieghe are leaving shortly. So, if they are the only bulls in the votes remember that the GBP could quickly retrace after an initial spike higher.


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