As the countdown to the next Bank of England rate decision dwindles to a mere two weeks, there is a palpable sentiment permeating financial circles that the current rate hike cycle may be cresting. This notion gains momentum, bolstered by the latest insights derived from the Bank of England’s Decision Maker Panel, which routinely canvasses Chief Financial Officers (CFOs) on a gamut of economic topics and continues to paint a picture of diminishing inflationary pressures. Let’s delve into the core figures:
Expectations for price growth in the upcoming year stand at 4.4%, or 4.9% if we average the last three readings. This marks the lowest projection since November 2021.
Anticipated annual wage growth, measured on a three-month moving average, currently registers at 5.1%. This reflects a slight decline from the 5.2% recorded the previous month and a more pronounced decrease from the 6% figure observed last December.
Consumer Price Index (CPI) inflation is forecasted to hover at 4.9% over the next year and 3.2% over the ensuing three years. These projections have closely mirrored the downward trajectory of actual inflation over recent months.
Notably, the survey reveals that 26% of firms find it “much harder” to recruit, a marginal uptick from the July statistics but a substantial decrease from the zenith of 66% reported last summer.
On the surface, these findings add weight to the dovish perspective within the Bank of England’s ranks, aligning with broader survey data trends.
Historically, the Bank of England accorded significant importance to the Decision Maker survey. However, there has been a discernible shift in recent times, with the central bank exercising caution in attaching too much significance to survey data, preferring to rely on hard data regarding inflation and wage growth, which have exhibited robust figures.
Furthermore, policymakers remain acutely cognisant of the disparity between firms’ expressed expectations of price increases and their subsequent actions, often marked by a more assertive stance. According to this survey, “realised” price growth consistently outstrips “expected” growth, as depicted in the accompanying chart.
The fate of future rate hikes largely hinges on the dynamics of services inflation and wage growth. The Bank of England has outlined that the next decision will be contingent on three key variables: services inflation (scheduled for release the day preceding the next meeting), private sector wage growth, and the vacancy-to-unemployment ratio (both to be unveiled on Tuesday). These indicators are poised to paint a mixed picture.
Private sector wage growth presently stands at a robust 8.2%, with the likelihood of it maintaining this level when fresh data emerges next week. However, there exists a peripheral risk of a slight dip, given separate payroll data that suggests median pay fell during August, a month ahead of the traditional average weekly earnings figures. This may coincide with a marginal uptick in unemployment and a renewed decline in job vacancies, as the ratio of unfilled job openings to unemployed workers nears pre-pandemic levels.
Meanwhile, services inflation, presently perched at 7.4% and scheduled for release on September 20, may witness a fractional uptick of a tenth of a percentage point, marking another peak in the ongoing cycle. Nevertheless, this pinnacle is anticipated to herald a subsequent retreat as lower gas prices exert a moderating influence.
In summary, the Bank of England is poised to implement another 25-basis-point rate hike in a fortnight. However, our baseline scenario envisions this as the culmination of the current tightening cycle. Governor Andrew Bailey’s assertion that we are nearing the apex of the tightening cycle came with certain caveats but is indicative of the broader communication strategy adopted by the Bank, hinting at a forthcoming pause.
Chief Economist Huw Pill’s allusion to a “table mountain” profile for interest rates offers further insight, emphasising the Bank’s growing concern with the duration of elevated rates rather than the pinnacle they reach. References to policy becoming “restrictive” in the August policy statement echo this sentiment.
While a November rate hike remains a possibility, contingent on data flow, recent pronouncements from the Bank lend credence to our belief that a pause is more likely at that juncture.