How the Bank of England Decision Signals Its Path Beyond One Hike

Markets have almost fully priced in a 25-basis-point Bank of England rate hike, so the decision itself carries little surprise. The Bank of England decision signals its path beyond one hike through the meeting minutes, the governor's press conference and the updated inflation and growth forecasts. UK inflation stands at 3.5%, services inflation has risen to 3.7% from 3.4%, and both sit above the 2% target. With markets pricing in three to four more hikes, policymakers' guidance on that path is what moves expectations.

Fiona Cincotta, StoneX Senior Market Analyst, covers currencies, equities, commodities and macroeconomics, with a focus on UK and European market themes. That coverage gives insight into how UK inflation, Bank of England guidance and the euro feed into sterling.

Key Themes

• UK services inflation rises to 3.7% from 3.4%, a sign energy costs are reaching the domestic economy.
• Markets price in three to four more Bank of England hikes, putting guidance on future moves in focus.
• EUR/GBP holds an entrenched downtrend that hawkish and dovish Bank of England signals push in opposite directions.

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Bank of England Guidance Tests Market Pricing of Further Hikes

Bank of England guidance on future hikes carries more weight than the hike itself when markets already price in three to four further 25-basis-point increases. "I think we may see policymakers just push back slightly on these expectations, which feel quite aggressive," Cincotta says, pointing to the meeting minutes as the place that pushback would surface. Her reasoning stems from the growth outlook, because higher UK interest rates weigh on growth. A Bank of England that raises rates while signaling fewer increases ahead delivers what markets call a dovish hike. Conversely, policymakers insisting that more hikes are needed would validate the aggressive pricing already in the market.

EUR/GBP Swings on Hawkish or Dovish Bank of England Signals

Sterling's reaction to a Bank of England decision depends on the tone of the guidance, and EUR/GBP shows how that plays out. The pair sits in what Cincotta calls "a very entrenched downtrend", reflecting a pound that has held firm against the euro. According to Cincotta, "if we see that the Bank of England adopt a more dovish hike, so pushing back against aggressive rate hikes going forward, then we could actually find that this may see the pair recover", with the euro strengthening against sterling. A more hawkish hike that lifts sterling points the other way, toward a lower EUR/GBP. As a result, a rate rise alone does not settle which way the pound moves.

Bank of England Path Signals Surface in the Minutes and Forecasts

The Bank of England's path beyond a single hike shows up first in the meeting minutes, where any pushback against market pricing of further increases would appear. Governor Andrew Bailey's press conference adds the policymakers' framing in their own words, while the updated inflation and growth forecasts show where the outlook for the UK economy is heading. Service sector inflation, "a gauge that the Bank of England looks to quite closely for clues over price pressures in the domestic economy", shows if rising energy prices are seeping into the wider economy.

--- Written by Frédéric Guétin, StoneX Media Producer

--- Expert: Fiona Cincotta, StoneX Senior Market Analyst