Bank Rate to rise for 13th consecutive month, but will BoE favour 25bps or 50bps?
The main event today will be the BoE’s monetary policy announcement at midday, where the MPC will undoubtedly deliver a thirteenth consecutive hike in Bank Rate. But the magnitude of tightening is uncertain. The significant upside surprise to yesterday’s inflation figures, in particular the upwards shift in core inflation to a new three-decade high, suggests the BoE’s forecast published last month was far too optimistic. And taken with the jump in private sector pay growth in April amid the still-tight labour market, there is no doubt that evidence of inflation persistence in the UK has increased significantly since the MPC last met in May.
Given the significant tightening of monetary policy to date – with Bank Rate up a cumulative 440bps since November 2021 – and additional marked tightening in financial conditions following the recent wage and price data evident not least in the mortgage market, the majority on the MPC might well still want to tread carefully and maintain the magnitude of increase at 25bps as in the previous two meetings, taking Bank Rate to 4.75%. But with the BoE having evidently lost faith in its forecast capabilities, and under significant political pressure to demonstrate a willingness to get to grips with the UK’s inflation problem, there is also a significant possibility that the MPC will tighten by 50bps, to take Bank Rate to 5.00%. Certainly, the decision will be split, with the more hawkish external members – Mann and Haskel – and possibly Deputy Governor Ramsden set to vote for the substantive hike while the external doves – Tenreyro and Dhingra – are likely to remain more cautious. Either way, the MPC will certainly hike rates today and also likely signal additional tightening over the summer.
Euro area consumer confidence expected to post modest improvement; French business conditions stabilised at the end of Q2
Sentiment surveys dominate the euro area’s dataflow today, with the Commission’s flash consumer confidence index expected to have edged slightly higher in June (up 0.4pt to -17.0) to mark the eighth increase out of the past nine to its highest level since before Russia’s invasion of Ukraine in February 2022. Admittedly, initial survey results from the Netherlands (down 1pt to -39) and Belgium (unchanged at -9) suggest that risks to this forecast are skewed to the downside. Furthermore, the Commission’s index would still remain well below the pre-pandemic level (-6.1) and long-run average (-10.4).
Ahead of tomorrow’s flash PMIs, this morning’s INSEE survey suggested that French business conditions remained broadly stable at the end of Q2. In particular, the composite business climate index moved sideways at 100 in June, bang in line with the long-run average. While this was the joint-lowest reading since April 2021 and well below the highs recorded during the post-lockdown bounce in the second half of 2021 (which averaged 111), like the BoF survey, today’s survey results were nevertheless broadly consistent with our view for modest French GDP growth at about 0.1%Q/Q in Q2. Within the detail, the headline manufacturing sentiment index reversed the 2pt drop in May back to 101, amid slight improvement on production expectations and domestic order books particularly in the auto subsector. Retailers were also more upbeat, with the respective sentiment index the joint-highest since February 2022. But while the business climate stabilised in the services sector at an above-average level (102), the index was nevertheless the joint-lowest since April 2021. And construction sentiment fell for the seventh consecutive month, similarly to its lowest for more than two years.
Existing home sales and various activity indices due, while Powell is in action again today
Fed Chair Powell will repeat his semi-annual monetary policy testimony before the Senate Committee on Banking, Housing and Urban Affairs today, sounding a hawkish tone and signalling further policy tightening this year. In turns of economic releases, the latest existing home sales figures are expected to report a third consecutive monthly decline, with high prices, restrictive lending standards and elevated mortgage rates severely dampening affordability. The latest Chicago and Kansas Fed activity indices are also due.