Bank of England votes 6-3, but shows no urgency to hike
Thursday’s BoE meeting delivered some contradictory messaging, with policymakers keeping one foot on either side of the fence.
Highlights:
Bank of England votes 6-3 to keep rates unchanged.
MPC sees clear signs of disinflation, no second round effects so far.
Fed holds rates, but Warsh fails to strike a hawkish note.
US growth slows in Q2, supporting cautious approach to Fed hikes.
Euro Area economy rebounds amid AI boost, higher government spending.
Sterling bounced on the news that an additional rate-setter, Catherine Mann, had unexpectedly voted in support of an immediate hike, joining the two hawks that favoured one at the previous meeting. Yet the messaging in the statement and governor Bailey’s press conference was far less hawkish, with officials pointing to signs of disinflation and no evidence of second-round effects originating from the spike in energy prices. In short, the MPC remains divided as ever, as while the voting split points to a growing preference for hikes, the majority of the committee are exhibiting no sense of urgency.
The big mover of the day on Thursday was the Japanese yen, which soared by 3% on the dollar. The move had all the fingerprints of direct FX intervention given both the size and the speed of the move and the fact that it had been pre-warned by officials for a number of weeks. Yet history suggests that intervention rallies usually offer no more than temporary respite, and we see no reason to suggest that this time will be any different. Amid ongoing fiscal concerns and elevated energy prices, a more durable, longer-term rebound may be tough barring a clear hawkish shift from the Bank of Japan, making today’s meeting all the more important.
USD
This week’s FOMC announcement failed to change our mind that the Fed will hold rates, rather than raise them, during the remainder of 2026. The standout detail of the statement was that as many as three members, Hammack, Kashkari and Logan, all voted in support of an immediate rate increase – marking one of the most divided rate decisions in years. While this reads as hawkish on the surface, the dollar lost ground as not only had futures priced in a non-negligible possibility of a hike, but Warsh gave no real indication that the Fed was poised to tighten at upcoming meetings. Granted, he did affirm a committent to the inflation mandate, though he stopped short of signalling that hikes were the mechanism to actually achieve it.
While markets are continuing to fully price in a 25 basis point hike between now and year-end, we favour a prolonged pause. Warsh’s press conference gave us the impression that he intends to use words, rather than action, to anchor inflation expectations, and his emphasis on not overreacting to individual data points suggests that the Fed may not act, even if the next couple of inflation reports come in hot. In other news, yesterday’s Q2 GDP reading came in a little soft – 1.5% annualised growth versus the 2.1% estimate. Both the headline number and the details of the report, notably weaker near-term price pressures, should support the Fed’s cautious approach to higher rates.
EUR
The Eurozone appears to be holding up rather well in the face of the Iran war shock. The common bloc economy expanded by 0.4% on a quarterly basis in Q2, a solid acceleration from Q1 and twice as fast as expected. Growth appears to have been supported by increased investment in AI and higher government spending, both of which offset higher energy costs stemming from the war – which doesn’t appear to be having an alarming impact on either business activity or consumer confidence. Markets barely reacted to the news, however. The euro edged up modestly, while money markets were unmoved.
Yet the data will bolster the hawks’ argument that the Euro Area economy is resilient enough to withstand further tightening, and a September rate hike from the ECB remains firmly on the table – particularly if hostilities in the Middle East persist. The ongoing conflict and a spike in energy costs remain key risks to growth, given that the Eurozone is a net importer of energy. While oil prices have eased from their highs, they remain elevated, and the rise in natural gas prices to multi-year highs is adding to concerns.
GBP
The Bank of England’s 6-3 vote to hold is a mild hawkish surprise, though we would not read too much into Catherine Mann’s defection. The more important story is the gap opening up between the vote and the tone of the bank’s rhetoric – remarks pointing to clear signs of disinflation and little evidence of second-round effects read considerably more dovish than the vote split suggests. This mismatch is unusual and, in our minds, points squarely to a stark divide between the hawks and the doves on the committee.
Indeed, the MPC now sees inflation peaking much closer to 3% than 4% this year, which we don’t think is high enough to warrant undue panic or force the bank’s hand. The hawks will argue, of course, that the spike in energy prices warrants pre-emptive insurance tightening, though that argument only really holds if the shock threatens to feed into underlying inflation, and it doesn’t appear as though the majority of the committee believes it will. Sterling received a boost as markets moved to price in a hike towards the end of the year. We’re not convinced this will come to pass, and these bets could unwind pretty quickly should we see a peaceful resolution to the Iran conflict. Worth noting too that the MPC has already flagged tighter financial conditions as doing some of the heavy lifting, and a further sell-off in gilts would only reduce the need for the committee to act itself.
Economic Calendar
Friday (31/07)
Tokyo CPI Inflation (Jul) JPY 00:30
Unemployment Rate (Jun) JPY 00:30
Retail Sales and Preliminary Industrial Production (Jun) JPY 00:50
NBS PMIs (Jul) CNY 02:30
BoJ Interest Rate Decision JPY 04:00
Unemployment Rate (Jul) NOK 07:00
Retail Sales (Jun) CHF 07:30
Preliminary HICP Inflation (Jul) EUR 10:00
GDP (final May / prel Jun) CAD 13:30