The Daily Update: BoE hikes

Bank of England economist Huw Pill was speaking last night saying that the BoE will have a “live” decision at its November 4th meeting on any rate hike adding the decision “is finally balanced”. Pill went on to say, “I would not be shocked, let's put it that way, if we see an inflation print close to or above 5%, in the months ahead, and that is a very uncomfortable place for a central bank with an inflation target of 2% to be”. Recent comments from Governor Andrew Bailey and others have moved market expectations very quickly to price in several rate rises with an aggressive BOE cycle of hikes beginning on November 4th, with the key rate rising to almost 1.25% by the end of 2022 from 0.1% now.

Almost immediately we had the Retail Sales release for September which was by any standards a disaster coming in at -0.2% when the calls were for a 0.6% improvement, ex autos and fuel was even worse at -0.6% against plus 0.3% expected. The December 21 short sterling contract has fully priced in two 25bp hikes from the current 10bp BoE target rate and five-year gilt yields have traded up to 83bp from just 26bp just eight weeks ago.

We maintain that the global pick up in inflation is predominantly transitory, however, from our experience inflation can be a sticky animal and may take longer than first thought to work its way out of the system especially with the current supply bottlenecks.