BOE Won't Be Knocked Off Course by Slowing Inflation

A better-than-expected set of August inflation data is unlikely to deter the Bank of England from raising its benchmark interest rate on Thursday to 5.5%. But with monetary tightening starting to bite, that will be its last in its 15-step hiking cycle. A November move is no longer priced in, as 10-year gilt yields have fallen 15 basis points to 4.25% since Tuesday afternoon, with similar moves across the yield curve.

In line with the European Central Bank's hike last week, BOE policymakers know this is almost certainly their last opportunity to seal the deal on tightening monetary conditions. Their reputation badly shaken when headline inflation soared to over 11%, policymakers don’t wish to be accused of not reacting sufficiently. A still-tight labor market and some of the strongest wage rise data on record provide ample justification. Furthermore, although the Federal Reserve on Wednesday is expected to pause, the UK increase will come with a hawkish message. The BOE can’t be seen as more dovish than its peers, and consistency of its message is important.