Europe Economic Weekly: Leading the pack of hawks

Research evidence excerpt

Europe Economic Weekly: Leading the pack of hawks

hike from the Bank of England (BoE) next week. Dovish

inflation/labour market data, lack of explicit guidance on June and the MPC’s patient

approach are likely to mean a hold. So far, the MPC is taking comfort from the

tightening in financial conditions, which they say can give them time to assess and

gather evidence on whether to hike. We expect the MPC to vote 7-2 for a hold, with Pill

and Greene supporting a hike. But we think there are risks for a 6-3 split. The message is

likely to be balanced, with the door open to modest hikes. Given the uncertainty, we

don’t expect explicit a pre-commitment/guidance for a hike, but do expect them to

continue to rule out near-term cuts. But relative to the current patient approach, we

think risks are titled to a somewhat hawkish tone as the energy shock persists.

Is a July hike also at risk? We expect two hikes in July and September (with risks of one).

Risks are titled towards delays but we do worry that the more the BoE delays, the

greater the risks of reduced market pricing for hikes, undoing some of the tightening of

the curve, which is currently doing the work for them. But we do see some merit in the

argument for a delay to September when higher inflation outturns are released.

Moreover, a lasting deal that meaningfully and sustainably reduces oil prices or a

material worsening in the labour market would increase the risks of a look-through

scenario for the BoE. Either way, there is greater risk of a look-through than of more

than 50bps of hikes.

UK: there are also some fiscal risks

The upcoming by-election in Makerfield on 18 June is the next key event for the UK's

political and fiscal outlook. We go through details here. But what is at a stake from an