Out of the Matrix & Back to Macroeconomics?: BoE Preview | Europe

Research evidence excerpt

Out of the Matrix & Back to Macroeconomics?: BoE Preview | Europe

IdeaMkeep Bank Rate unchanged. Alongside the vote split, the market reaction is likely to be

driven by the Committee’s broader messaging and the individual members’ paragraphs.

Broadly speaking, investors will likely focus on whether the rise in energy prices has

lowered the bar for a near-term hike, as well as on how the MPC’s assessment of inflation

expectations and potential second-round effects has evolved.

The Committee is likely to acknowledge that renewed tensions in the Middle East have

increased the upside risks to energy prices and inflation. On the hawkish side, the MPC

could emphasize that, as energy prices have remained elevated for longer, the risk of

second-round effects has increased and could support a pre-emptive hike in the near term.

We expect the Committee to retain a tightening bias, with the forward guidance

continuing to stress that the evolution of the Bank Rate path remains dependent on

energy prices. Any suggestion that the prolonged period of elevated energy prices has

materially increased the risk of persistent domestic inflation could therefore drive a

hawkish market reaction.

On the other hand, the Committee may stress that recent data continue to suggest that

underlying disinflation has remained on track so far, while a loosening labour market

should limit the risk of material second-round effects. In addition, the market currently

prices in around three hikes, close to the peak reached in the aftermath of the March MPC

meeting. The material tightening in financial conditions since the conflict began is also

likely to continue to be recognized by the majority of MPC members as an important

offset, reducing the need for an immediate policy response.