BoE preview: cautious first hike of several
- Rapidly falling spare capacity and excessive inflationary pressure appears to have become intolerable for the MPC, whose hawkish guidance has raised expectations for a Nov-17 rate hike. I expect them to follow through by 8-1 votes.
- This hike would offset the upside inflation news since August, but leave the market pricing an insufficient tightening to balance the inflation risks around the target. Guidance on this and a “gradual and limited” cycle are likely to remain.
- There is a fundamental need to return rates to neutral, amid a near zero output gap. The market doesn’t appear to be pricing that in the UK or US, but probably can’t and won’t be pushed to that point yet.
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