The BOE is the last of the major banks to hike this cycle, and the expectation is that it will follow its peers – with a twist. Both the ECB & Fed hiked rates last week by a quarter-point, but implied that any further increases in interest rates would be dependent on the data. The ECB leaned towards another hike; the Fed leaned toward a pause. Both left the door open that this could be the end of rate-hiking.
The BOE, on the other hand, is facing persistently high inflation and likely doesn’t have the luxury to imply it’s at the terminal rate. The BOE forecasted that inflation will fall dramatically during the fourth quarter.
The patience is running out
Although the BOE was among the first to raise rates, its slow pace has allowed inflation to continue rising. BOE votes to continue the pressure on inflation were divided. Unlike ECB and Fed rate decisions, which have unanimously been made, BOE has divided votes. The current theory among central bankers is that it’s the expectation for lower inflation that drives down prices.
The theory argues that central banks need to have the “credibility” to fight inflation, which means that market makers have…