The primary reason is that the BoE is rapidly risking stifling UK growth if interest rates rise much higher. Last week’s expectations were that the Bank of England would need to hike 5 more times in 25 bps increments before it is done with hiking. If this happened as quickly as markets are projecting then UK growth would likely be crushed in an unhelpful way. The BoE is unlikely to affirm this rate picture.

UK core inflation is too high

The UK’s core inflation reading still reads as one of the worst in the G20. However, this is not enough to see the BoE signal more rate hikes. Why? Because the recent rapid pricing of more rate hikes is disruptive for UK businesses and homeowners. The lack of certainty over the path of rates is too costly for the BoE to signal. Two-year mortgage rates in the UK are now above 6% as of this week. The cost of renting is surging in the UK and record levels of disposable income are now going on just paying the rent as landlords pass on these rising mortgage costs.

Inflation is coming down

Expectations are that the UK headline and core inflation readings will eventually fall especially as base effects in energy and food come into play around July (should show up most clearly in the UK’s August inflation data). So, the BoE will not want to signal that the move-in yields are correct on Thursday’s meeting. Expect a slight pushback from the BoE on Thursday to the view that it needs to hike to 6%.

‘Buy the rumour, sell the fact’

A 25 bps rate hike is widely anticipated by markets but after yesterday’s high core inflation print at 7.1% y/y with 6.8% the prior there is a 42% chance that the BoE hikes by 50 bps. The GBP is likely to see a ‘buy the rumour, sell the fact’ response. In fact, Seasonax* shows that over the last 10 years, when the Bank of England has hiked interest rates, the GBPUSD pair has fallen over 80% of the time with an average fall of 1.01%. See the stats below.

The risk to this outlook is if the BoE does signal rising rates at the level the short-term interest rate market is expecting. However, if it does that then the market will likely still sell the GBP as it will be perceived as the BoE sending the UK into a stagflationary environment (high inflation, low growth) which will also be GBP negative.

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